Retiree's savings at risk

My retired mother lives off the interest of a trust, which is managed by a bank. At the beginning of the year the balance was $700,000. Now it is down to $375,000. I looked at her portfolio and was shocked
to discover that 99% was invested in stocks and stock mutual funds, and only 1% was in a money market fund. From the books and articles I have read, it seems like many writers agree that at least 40% of a retiree’s money should be in bonds. Should she put 40% of her money into bonds and the money market fund, now that it has lost almost half its value this year?
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It's impossible to say without knowing a lot more about her situation.
How old is she? How much money does she need? What other sources of income does she have? What is her risk tolerance?
This last question is particularly important. If you're surprised to find out the composition of her portfolio, it suggests that there was never a serious effort to answer that question. If there was no answer a year ago, there is still no answer.
Here are two possible scenarios:
1) You move 40% into bonds and money market, the stock market recovers to its level a year ago, and instead of getting her $700,000 back, she then has $575,000.
2) You don't move 40% into bonds and money market, the stock market loses another 50%, and instead of $262,500 she has $187,500.
In other words, if she moves money into bonds now, she is locking in past losses and forgoing possible future gains in order to defend against possible future losses. Depending on her situation, that may or may not be a wise move. There's no way to know without knowing much more about her situation and preferences.
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My mother is in her late 70's. She doesn't have much else to live on except this trust. She can't afford to take many risks. She doesn't know much about investing. She still has not taken a close look at what is in her portfolio, I had to tell her.
I am concerned that is she moves a lot of her money into bonds, the balance of the trust will be permanently, and seriously reduced. I think she should move some of her money into bonds. I don't know how much. 99% in stocks seems foolishly risky for a retiree no matter how the market is doing.
I don't know much about trusts. I'm assuming it's similar to having money in an IRA.

======================================= MODERATOR'S COMMENT: A reminder to all posters: Please trim the post you respond to and try to be as succinct as possible.
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To whom do the trust's contents go after your mother passes and the trust dissolves? Considering this. alongside the needs of the person receiving the trust income, is customary when determining how to invest the trust's contents.
Also, how much income does she receive from the trust each year, and who or what determines this amount? If her trust income is low enough, then she may not see much loss of it, since it is likely coming from dividends. So far, only bank dividends have been cut (and drastically for several banks).
Lastly, to double check, is the bank the sole trustee of the trust?
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I don't know much about my mother's finances. I think the trust goes to my late stepfather's family after my mother dies. If they have an interest in the trust, maybe they should get involved and talk to the bank. I'm not sure, but I believe my mother gets a certain percent of value of the trust. She is worried that she will not have much to live on if it has a low balance. I have no idea if the bank is the sole trustee of the trust. I'll have to talk to my mother.
On Nov 25, 10:25 am, snipped-for-privacy@gmail.com wrote:

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She is going to have to call the bank and ask them what they can legally divulge to her. Try to get the questions I asked earlier answered.
An alternative is to see if your stepfather's family has a copy of the legal documents setting up the trust. It is not going to be difficult reading. The income she is permitted will be clearly spelled out, unless the lawyer who prepared the document was an idiot (never say never). In particular, are the trustees allowed to cash in principal to pay whatever income the trust says she is allowed? With the step- family, this may be a touchy situation, as I am sure you can imagine.
As far as the bank investing aggressively, the biggest concern with banks as trustees is churning: They want to buy and sell often to rack up transaction fees for themselves. But the fact is they make a pretty penny just from sitting there being trustee without the benefit of any transaction fees.
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Lots of questions here. First, if your Mom was 100% invested in Vanguard's S&P500 fund it would be worth $414,400 minus what she draws. I think the first thing I would do is find the agreement she has with the bank. Make sure the portfolio is being managed as described in the contract. I can't imagine that a retiree's portfolio is 99% in stocks especially if it's purpose is to generate income.
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Actually, I'd say more like $420K (can't forget dividends), but that's irrelevant. The point is that this 99% stock portfolio has underperformed the S&P 500. In addition, the OP's mother is quite likely paying dearly for that privilege. That's not a good situation.
Personally, I have no problem with an all-stock portfolio, even for a retiree. But that porfolio has to be properly diversified. One of the the primary purposes of adding bonds to a stock portfolio is to smooth out volatility. Unfortunately, the OP's mother has already suffered through the recent volatility. Switching a portion of her portfolio to bonds NOW will not undo that damage.
Finally, I whole-heartedly agree with Andrew's assessment of the situation. If the OP's mother switches to bonds now, she will lock in the losses she has already suffered. True, it will help defend against future losses, but at the cost of future gains. Is that the right move? That's not something this newsgroup can decide.
Best of luck, Bill Woessner
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Talking about "locking in" losses is irrelevant. If she has $375 K now, the fact that she started the year with $700 K should not affect her asset allocation going forward, especially since exchanging some of the money from a stock mutual fund to a bond mutual fund should not incur fees or taxes. What does matter is one's forecast of future risk and return on stocks, bonds, and other assets, and her tolerance for risk. I think corporate bonds offer better risk-adjusted returns than stocks at present, for reasons I have discussed in other messages.
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Actually, it might. If your objective is to have the least risky portfolio that you expect to provide a particular amount of income, then it seems to me that it is reasonable to change your asset allocation as the portfolio's value changes.
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Are you saying selling stocks and stock funds now would not cause a long term loss in the balance of the trust? When the market goes back up, isn't it likely the stocks will go up in price more than bonds (and other instruments). Wouldn't that cause the trust to lose money it may not be able to regain? Maybe I don't have a good understanding of this.
On Nov 25, 1:22 pm, snipped-for-privacy@aol.com wrote:

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On Nov 25, 1:22 pm, snipped-for-privacy@aol.com wrote:

It sounds like you're ignoring conditional probability here. Or perhaps you believe that the future performance of the stock market is independent of it's past performance. "Past performance is no guarantee of future results", right?
On the other hand, I would argue that stocks are now likely to go up BECAUSE they have taken a recent hit. It's reversion to the mean, if we define the mean as exponential increase. I would further argue that investors in general accept that definition of the mean.
--Bill
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I'm not sure what you two are arguing about. I don't exactly understand what you're saying.
I'm not sure what my mother should do. Here are some possible options and outcomes, that I can think of, for my mother and her trust.
If she doesn't change the holdings in her trust and the market doesn't go up for months or a year or more, my mother won't have a lot to live on. When the market recovers, the trust should regain its value. What is the possibility that some of the stocks or funds never recover?
If she sells some stock and puts it in a money market fund or a CD, she would keep that money from losing any more value; but is she risking never regaining her losses?
If she sells some stock and buys some bonds, she may not lose as much money as with stocks; and the money will be worth more when the market recovers than if she put the money in a CD.
Are these realistic possibilities and options? What do you people recommend?

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tighwad wrote

Unless she is trustee of the trust, then these are not realistic scenarios. As a non-trustee, she would have no say in how the trust is invested.
Recipients of the income from a trust are often not the trustees of the trust.

Find out where a copy of the trust is and whether your mother is entitled to read it. If the other relatives and the bank refuse to share a copy or do not have one, then she would have to hire an attorney.
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No way to know.

Yes indeed.

Yes indeed. And it won't be worth as much as it would be if she leaves it in stocks. If the market recovers, that is. If it doesn't, then she'd be worse off.

I don't see how it can be possible to know what courses of action are reasonable from the details you've provided.
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What she had in January is totally irrelevant. That's ancient history. The very phrasing of the questions is misleading you.
Don't think in terms of "recovering her losses". Think in terms of what is the best way to invest going forward. Key things to think about are:
1) How much she needs to withdraw each month to live. 2) How long is she likely to need it? 3) What is the best way to get that income with appropriate risk? 4) If you can't get that income over that time with appropriate risk, how does she reduce expenses to the income she can get? 5) Do you (or her) have any control over this anyway?
I did read today that the dividend yield on the S&P 500 has exceeded the interest yield on 30 year Treasuries for the first time since 1958. Of course, some of those dividends are at risk in this climate.
-- Doug
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[snip}

Great point about the dividend yield. It has been higher in the 20th century, always at market bottoms, and only twice above 8%. It was huge at the 1932 bottom (18% - no one wanted stocks - they were toxic assets before their time). I think in 1982 it was about 7%. (Data from _Conquer the Crash_, Robert Prechter, 2002.) (2002! He called the FNM FRE bust and Fed bailout, bank failures, and more. It's very clearly in print.) He cites the bond yield / dividend ratio as a main indicator. If I read the charts and his thesis correctly, when that falls to 1.0 or less, it may be an indication the market is undervalued. And the converse - e.g. it was above 8.0 in 2000. I hear bond yields are inflation adjusted negative today, and I don't know what that means for stocks!
To date this year, very few companies have cut their divs. Hope I'm not being a foolish optimist here, but I don't think we're heading into "another 1930's".The earnings are always the number to watch, since that sets the payout ratio.
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Bear in mind that in 1982, the 30yr treasury was yielding 13+%. (as was the 10yr).

Or that bonds are overvalued.
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[snip]

[snip]
We do all understand that you are upset looking at the decline in value of the trust.
As a few have mentioned, you do need to get specifics. The stocks you mentioned are probably large / low risk / growth category. The funds seem to be oriented towards growth. The likelihood is that as the market recovers, the trust will recover, but that's no more than a guess. Does your mother withdraw dividend and interest income, only, and how much? Does she withdraw a set amount of principal periodically?
As another poster suggested, I recommend you get an attorney with some experience in trusts and their funding to advise you.
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I can ask my mother about the contract. I doubt if she knows what it says. She's pretty much hands-off. She seems to have left things up to the bank, and doesn't know much about what they're doing. The account had apparently been doing pretty well up until recently.
I don't know if the bank can sell anything in the trust like an IRA. It may be that she can only get a percentage of its earnings. Maybe that's why the bank has been investing so aggressively? I don't know. I don't know much about trusts.

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