For Preservation and Income

I recently read an article from 1968 which sought opinions on how a new widow should invest $100,000 that she received as life insurance from her recently deceased husband. $100,000 then inflates to approximately $923,000 in today’s dollars, so not a small sum to sustain yourself on. There were two contrasting opinions as to how she was to invest the money, in order to produce $5,000 per year for expenses. The inflation hurdle at that time was between four and five percent, much higher than what is usually modeled in today’s financial plans.

On one side, a broker, who was also a widow, recommended and mix of thirty percent in a balanced mutual fund, twenty percent in individual bonds and thirty five percent in common stocks, with the remainder in cash. This portfolio would have generated $5,067 per year for the newly widowed woman. The strategy here is to have an income stream that you can rely on to pay the bills and use the growth of the investments to maintain the purchasing power of the money.

On the other hand, another broker recommended the following: 12% in cash, available for buying opportunities, 19% in bonds and preferred stocks, 45% in dividend payers and the remaining $24,000 for speculative names that would benefit from the end of the Vietnam war – construction, medical care and education. This portfolio would generate $3,684 in income and the rest of the income need would be met through capital appreciation proceeds. This broker states that he would “be inclined to send the client a check of $500 per month in the hope of making up the difference through capital appreciation”.   He used the word “hope”. When it comes to investments, hope is a dangerous thing. Hope is right up there with fear and greed.

So, which one do I think is correct? Neither. Actually, I have no idea which path is best because I don’t know anything about the investor. If the goal of this exercise is to determine the best way to preserve capital while providing needed income, then I’d probably lean toward the first scenario. If the client knows that the basic needs are met, then she may be able to better tolerate the fluctuations of the markets. But, maybe, the client has zero tolerance for risk and doesn’t want any volatility. That would make either proposal suspect.

Two professionals came forward with similar but different proposals for the woman. In a way, they could both be suitable based upon a discussion with the investor around risk and expectations. Incidentally, the mutual fund that the first broker recommended, the Affiliated Fund, now the Lord Abbett Affiliated Fund (LAFFX) has returned an average of 10.58 percent per year since its inception in 1950. That portfolio would have worked out very nicely!


Sources: New York Times Archives, November 18, 1968


This article is written for informational purposes only and should not be relied upon as investment advice. All investing involves risk and you should consult with a qualified advisor to determine what is most suitable for you. This is a not a recommendation to buy or sell any securities spoken about in the writing.