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Are You Taking Too Much Risk In The Stock Market? 

Howard Gensler  |  August 1, 2023

According to classic formulas, investors should take on less risk in the stock market as they age — but that’s not what’s happening. 

What’s your appetite for risk in the market? It’s a topic we’ve discussed often in HerMoney’s InvestingFixx club, but a recent study has put the question into perspective in a new way. 

According to data from Vanguard, nearly 25% of investors in taxable brokerage accounts aged 75 to 84 and 20% of investors over the age of 85 have nearly all their money in stocks. Read that again. Nearly all their money in stocks. This flies in the face of the conventional advice that individuals in retirement should keep no more than 50% of their portfolio in stocks, sometimes even less, depending on their risk tolerance. (The logic here is that as we age and edge closer to retirement, we should start shifting our money into “safer” investments so there’s less risk of loss if the market takes a tumble right before we need it.) 

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But what does this study really show about the risk we’re taking — and what happened to the classic formula? 

For starters, many retirees may not even realize their risk tolerance has changed, explains Stacy Francis, Certified Financial Planner, CEO of Francis Financial and founder of the SavvyLadies financial education platform. “We’ve seen a big run up in the amount of equities that individuals own,” Francis says, “because we’ve had a decade of an unbelievable bull market. A lot of individuals, unfortunately, just set it and forget it.” In other words, many investors aren’t regularly checking in on the balance between bonds and stocks in their portfolio. And “because stocks have been growing so much faster than bonds, they end up finding themselves out of whack, and taking on more risk than they realize,” Francis explains. 

When Should You Rebalance Your Portfolio? 

Short answer? Twice a year, Francis says, citing Vanguard guidance. Checking in on a regular 6-month schedule — treating it as you would a dental cleaning, for example — is ideal. Set your calendar to do it every January and every July. (And if you haven’t checked in on your portfolio in a while, now’s the time.) 

 “This is important,” Francis says, “because it takes out the market timing and it creates a systematic program where you go in, you review your investments, and you rebalance back to that risk asset allocation you set out to have.” Investors who do this are the ones who outperform over time, she says. 

So, What’s The “Perfect Balance” vs. Too Much Risk?

Too much risk looks a little like this: You log onto the internet or turn on the news and “feel your heart drop into your gut,” when bad financial news makes headlines, Francis says. In short, “you’re taking on too much risk if any loss in your portfolio is causing you anxiety and distress,” she explains. 

Over the last couple of years, the continued rise of stock prices combined with low bond rates has made it tough to rebalance — we all fear leaving profits on the table. In terms of the best age-based mix to shoot for, an 80/20 ratio of stocks/bonds is too high for retirees, Francis says.  She suggests investors should consider dropping to 50/50 around age 60, and a 60/40 split is the norm for people in their 50s who are still earning an income and have more than a decade to recover should the market take a dip. 

But every investor’s risk tolerance is different. Some of us like to put the hot sauce on our ghost peppers, so to speak. And some investors who are behind in their savings may be tempted to take a bit more risk — and stay a little heavier in stock than they might like — to try to make up for lost time.  It’s not an uncommon strategy, but it’s a dangerous one.  Saving a little more, spending a little less or working a little longer is a safer path. (More on this momentarily.)

What’s My Risk Number? 

That said, the risk you (and possibly your partner) take with your investments needs “to be considered on a holistic basis for the entire household, and not focused on a single 401(k), IRA or brokerage account for one member of the household,” explains Jack VanDerhei, Director of Retirement Studies for financial services firm Morningstar. 

Only you know how much risk you’re comfortable with when you step back and look at your entire financial picture, VanDerhei says. You’ll need to look beyond your age and retirement goals, and you may want to turn to a financial advisor (or to an advisor who works for your retirement plan sponsor) for help with a more precise calculation that factors in your unique set of assets and liabilities. That’s because there’s risk inherent in following any generalized rule of thumb for what your personal risk picture should look like. Blindly following others’ recommendations may result in following “advice that is not optimal for the household in question – perhaps considerably so,” VanDerhei says.

And by the way, if you were looking at that Vanguard study and thinking to yourself, “I should be taking on more risk,” VanDerhei cautions that the study was not conducted on retirement accounts like 401(k)s and IRAs, but rather discretionary brokerage accounts. It didn’t take into account whether those stock-stacked investment accounts were filled with funds that are essential for retirees to live on — or whether they’re just mad money. So, consider this just one more reason why someone else’s risk tolerance should have nothing to do with yours. 

Tackling The Fear of Running Out of Money

One reason many retirees take on additional risk in their portfolios is to ensure their money will last as long as they do. Over the last few years, inflation has hit millions of Americans hard, particularly those living on a fixed income, and retirees who weren’t able to save enough during their working years may have felt pressure to take a bit of a gamble. 

Thankfully, those of us who are still in the workforce have options. “Any financial adviser will say that the best way to beef up your retirement portfolio is to increase your savings,” Francis says. “That is the way that you have direct control over the growth of your portfolio, because you’re fueling that growth. But for most people, it’s actually a combination of increasing their savings rate and also adding a little bit more exposure to stocks.”

Another incredibly lucrative option for soon-to-be retirees is to work longer. Francis says that in her practice, she’s seeing more than ever that clients don’t actually fully retire, for many different reasons, “We’re not seeing the type of retirement that most of our parents had where they retired, and they put their feet up and whatever they had in their portfolio was what they had in their portfolio. Today, we’re having all different types of retirement. Retirees are consulting, writing, and working part-time.” 

We’ll be diving into just how much more you can save by working longer in an upcoming InvestingFixx newsletter — we’d love for you to join us today


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