Should you lower or increase your risk as you get older?
By Deborah Jeanne Sergeant
At what point should someone segue from high risk–high reward to lower risk–lower reward in their retirement investments?
If you’re approaching retirement with a small nest egg, it may feel like it’s time to get as much as you can before you’re ready to retire. But that also places you at higher risk of losing money you will need in the next decade.
“It is perfectly OK to transition to a more moderate risk level as one approaches retirement but some percentage of equities — stocks and stock-funding instruments like mutual funds and ETFs — should be a part of any long-term, 4-plus years, investment strategy, even after one retires,” said Randy L. Zeigler, certified private wealth adviser and certified financial planner with Ameriprise Financial Services in Oswego. “Unless one expects to have a short retirement period, the need to hedge inflation is especially important during an extended retirement period, when most pension incomes do not adjust for inflation.”
The traditional pattern of buying and keeping investments for decades worked a generation ago, but Terri Krueger, chartered financial consultant and owner of Krueger Advisors, LLC in Syracuse, advises going with a small cap fund.
“It is a fantastic thing to own,” she said. “They’re doing incredibly well.”
Depending on how long you’ll need those retirement funds has a lot to do with the strategy you and your adviser form.
“Once a value goes down, it takes nearly twice the percentage of return to get it to go back up,” Krueger said. “If you can minimize the downturn, your recovery will take far less time in the market.”
Pulling out only the money needed can help the portfolio remain strong and generate more future income.
Cynthia Scott, financial adviser and owner of OMC Financial in DeWitt, doesn’t think anyone should have a high risk–high reward investment plan.
“You can have higher risk the younger you are, but you need a combination portfolio with some that are higher risk and other investments that are high quality,” she said. “NVIDIA is a higher-risk stock; you could balance out with McDonald’s in your portfolio. Have a combination of things with a little bit of risk and things more quality in nature.”
Traditionally, more people shift to more investments in bonds and less investment in stocks as they grow older. But Scott prefers going where the market indicates to invest.
“If interest rates are high, it makes sense to invest in bonds because you get a good return on your money,” she said. “Ten years before we saw interest rates go up, interest rates on bonds were practically zero while stocks on the other hand were providing a better return. The shift came when interest rates went up and you could get value for investing in bonds. You could take money out of the stock market, and it made sense to put it into bonds.”
Every situation is different, including the investor’s tolerance for risk. Zeigler said that people with longer time to invest have a greater need to hedge against potential inflation.
“Wide swings in stock and bond annual rates of return tend to get smoothed out with longer timeframes, so holding a mixture of conservative, moderate and aggressive investments is often the best way to construct a portfolio,” Zeigler said. “The percentage allocations to each area in the aggregate, are what determine the overall risk level of the portfolio. I have individual clients that could afford to hold investments with greater risks, but they are not personally comfortable doing that.
“It is often thought that the older a person becomes the more conservative their investment strategy should be. I have many clients in their 70s and 80s that remain comfortable with a moderate or moderately aggressive risk orientation. In fact, I have a 99-year-old client that owns many individual stocks in her balanced portfolio and feels completely comfortable maintaining a moderate risk structure with her investments. So, age is only one factor to be considered when constructing productive portfolio strategies.”
He added that the investing experience, timeframe for the need for cash, personal outlook on the economy and more influence risk assessment for investment.
Of course, you should seek advice from a qualified financial adviser familiar with your situation.
