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Smart Women, Smart Money (6/23/16 Issue)
Arcadia Weekly Jun 24, 2016
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Q: Dear Emmy: As I grow older, I feel the need to reduce my investment risk.
Is there a rule-of-thumb for when to become a more conservative investor?
In older age, shifting one’s investment portfolio into less risky assets is common. People in retirement have less time to recoup their losses if the economy takes a downturn. However, the need to “become more conservative” is determined by your financial objective. This risk-managed approach may work well if your primary concern is to avoid market volatility. Staying invested in the stock market could be advisable if your intent is to not run out of money during retirement or to maximize what your beneficiaries inherit. The challenge is to find the right balance.
Different families do not necessarily share the same objective. Even if they did, individual families encounter a different set of circumstances and they may need to plot separate courses to reach a similar point. For this reason, I cannot offer any sure-fire rule-of-thumb – nor should you accept one.
To directly address your question: there are several “turnkey” investment theories. For example, the “100-minus-age” rule. Its premise is that as an individual ages, their investment portfolio should hold a decreasing proportion of assets in equities and stocks (associated with higher risk) and a greater proportion in bonds and fixed-return investments (associated with lower risk).
This formula, and others like it, is based on legitimate insights, but the solution is radically oversimplified. This generic formula cannot replace individual evaluation and long-term planning.
Even in retirement, some may need to continue to invest aggressively. Because people are living longer and inflation is a fact of life, your investments need to grow if you are going to maintain a consistent living standard over an extended period of time. If someone retires at 60 and lives to 90, that is 30 years that their life savings must last – through markets both thick and thin. Investments on autopilot might not last long enough. Investors need to remain aware and educated.
A more comprehensive approach could be to separate your retirement money into different categories, or “buckets,” representing different investment time horizons and their corresponding risk factors.
Another course of action to consider: combine various investments that respond differently to market fluctuations. Choose assets whose returns do not move in unison with each other. For example, when stock prices decline, bond returns generally increase. No one can offer guarantees, but there are strategies that an investor could use to help reduce his or her investment risk without necessarily reducing their expected returns.
My rule-of-thumb advice is pretty consistent: sit down with a professional financial planner to chart a well thought-out course of action. A conservative approach requires purpose and educated intent.
Have a question for Emmy? Email her at smartwomen@ehfinancial.com or call her office at (626) 943-8833.
– Emmy Hernandez, Certified Financial Planner® Practitioner, Attorney at Law
Investment decisions should be based on an individual’s goals, time horizon & tolerance risk. Securities and Advisory Services offered through National Planning Corp. (NPC), member FINRA/SIPC, a Registered Investment Advisor. EH Financial Group, Inc. and NPC are separate and unrelated companies.
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