“Set it and forget it” may work well when our economy is humming along and stocks are going up. But during times of volatility, it’s time for us to take the wheel. Today, the stock market is down double digits, inflation is soaring and the Federal Reserve has plans to continue raising interest rates to fight the rising cost of living. All of this means that investments that were doing well are now in the crosshairs. Many women who have checked their portfolios lately have found they’re suddenly too exposed in one area of the market, or perhaps don’t have enough exposure in another.
Financial experts tell us that at age 40, we should have about 70% of our assets in stocks. At age 50, that figure should drop to around half. Yet a recent HerMoney and Alliance for Lifetime Income survey showed that one in four women have 20% more allocated to stocks than is recommended. (And 37% of Millennials, 30% of Gen Xers and 21% of Baby Boomers don’t know how their portfolio is allocated!) That means a lot of us are driving blind when it comes to our investments. And this becomes even more problematic for women who are close to retirement.
That’s where rebalancing comes in. It’s important to take time and realign your investments with your original plan, whether you still have decades to invest or are nearing retirement. It’s particularly important in Bear markets and the prospect of a recession looming. Now is the time to check in on your portfolio, and perhaps check in with a financial advisor as well. Here are some ideas to get your started.
HAPPY BIRTHDAY — TIME TO CHECK IN!
No, thankfully you don’t have to rebalance your portfolio every time the stock market tanks or the Fed raises interest rates, but you should make sure your plans are on course at least once a year. Do it on or around your birthday and you’re less likely to forget or over-manage, says retirement expert Anne Lester, an Education Fellow with the Alliance for Lifetime Income. Both can be a recipe for disaster, especially in volatile times. “If you pay too much attention you get sucked into a trading mentality,” explains Lester. “If you do it every year on your birthday you tend to not over-manage or spend too much time and energy.”
SHARE THE LOVE — AND THE RISK
Think about re-balancing a diversified portfolio like getting your car periodically checked and tuned-up. You don’t want to risk a tire blowing out or engine stalling because you didn’t change your oil on schedule. Similarly, portfolio re-balancing is about checking whether your financial plan is well-tuned and adjusted for the risks to your long-term goals. Investment growth is great, but your portfolio should also be protected to make your money last.
The idea behind a well-diversified and protected investment portfolio is to spread the risk among stocks, bonds, cash, alternative investments and sources of future guaranteed income, like Social Security and annuities. If one area is lagging, then the others can pick up the slack. How much is invested in each bucket depends on your age, time horizon and risk tolerance. The latter is uniquely individual. You want to sleep at night, and what gets you there is different for everyone. The typical rule of thumb is the longer your time horizon, the riskier your investments can be. That may change as you age, or as your life circumstances change.
When rebalancing, it’s important to see where you’re at on the risk scale. Has inflation or rising mortgage rates impacted your risk tolerance? Are your investments too risky, or are you playing it too safe, are things you need to ask yourself. If you answer “yes” to either, rebalancing to your new risk tolerance is probably in order. “Ask yourself what is the right level of risk for your time horizon,” says Lester. “When do you think you need the money” to provide you with income from your portfolio. If you are saving for retirement and won’t need the money for 15 to 20 years, you can be more aggressive, but if you plan on retiring in the next 5 to 10 years, you may want to slowly de-risk and begin to re-allocate parts of your portfolio, says Lester.
One important way to protect your portfolio is to make sure it generates enough protected income that you’re guaranteed to receive in retirement that you should use to cover your basic expenses. There are only three sources of protected income available today – Social Security, company pensions, and annuities. If you have a protected income gap in your portfolio, annuities can be a great way to fill that gap by creating an income stream that can last throughout retirement. This is incredibly important in retirement given that Social Security at best only covers about 40% of pre-retirement income for most people. With an annuity, your money grows tax-deferred, and when you retire you’ll get a regular fixed payout throughout your lifetime. It can even be adjusted for inflation if you select that option. Among the many other benefits, annuities can also help you keep your emotions in check. Think about it: with an annuity, you’ll know you’re getting monthly income that’s guaranteed and protected, whether the stock market is up or down, and you’re removing the stress of outliving your money. “Retirees and people planning for retirement should be planning for a truly diversified retirement portfolio, one that has the potential for growth but also includes the protection of annuities, to help cover the gap in guaranteed income left by Social Security,” says Jean Statler, CEO of the Alliance for Lifetime Income.
DEFER TO THE EXPERTS
Inflation, rising interest rates, and hyper-volatile markets have changed the investment game today. Stocks that were once in favor are now suddenly tanking, while others that were down are suddenly up. That could throw your asset allocation out of whack, requiring you to reassess your investment choices. It can be a complex task, but that’s where a chat with a financial advisor can come in. Whether you have $5,000, $500,000 or more saved, there are plenty of great financial advisors willing to help you sleep better at night. A good one will take a holistic approach to investment planning. He or she will look at your entire financial picture, and make sure your plan meets your short and long term objectives.
Knowledge is power. According to another HerMoney/Alliance for Lifetime Income survey, 80% of women who don’t know how to build wealth find themselves worrying several times a month about their finances, compared to just 50% who feel they know what they are doing. “The old retirement formula of Social Security + Pension has morphed into Social Security + 401K, resulting in retirement portfolios focused on ‘accumulation’ alone rather than retirement income,” notes Statler. “Answers to straightforward questions such as ‘when can I retire’ are more about diversification, account balances, quarterly returns, and weighted indexes than the uncomplicated solution pensions used to provide.”
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