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The size of your retirement nest egg and the pace
at which you plan to spend it—your withdrawal rate—
are the key determinants of the viability of your
financial plan for retirement.
But when it comes to your actual investment portfolio,
no other factor will have a bigger impact on your
portfolio’s success or failure than your asset-allocation
plan—your mix of stocks, bonds, and cash. Be too
meek and you heighten the risk of a shortfall; maintain
a too aggressive portfolio and you run the risk of
incurring a bigger loss than you could reasonably
recoup over your in-retirement time horizon. Although
it’s hard to go terribly wrong with a simple
50%
stock/
50%
bond mix, there aren’t any one-size-fits-all
asset-allocation frameworks for retirement portfo-
lios. An individual’s age, other income-producing retire-
ment assets (like pensions or Social Security), and
spending rate, among other factors, can all dictate
higher or lower equity or bond weightings.
As you evaluate your retirement portfolio, making
sure you’re sidestepping the following asset-allocation
pitfalls is a good way to steer your portfolio in the
right direction.
1
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Being Too Conservative
Survey market experts’ outlooks for the stock and
bond markets, and you’ll notice that true equity bulls
are in short supply. Even more scant are experts
who are expecting very strong returns from the bond
market; most agree that owners of high-quality
bonds will be lucky to earn a positive return once infla-
tion is factored. Cash looks like an even worse bet
from the standpoint of preserving purchasing power.
That means that on a long-term real basis, seemingly
safe securities aren’t all that safe.
The fact that most retirees need to hold a significant
position in stocks is not a terribly comforting message
in a period in which equity-market volatility is spiking.
But stocks give retired investors a fighting chance
at outgunning inflation, something cash and high-
quality bonds will be hard-pressed to do. That explains
why most all-in-one investments geared toward
retirees maintain healthy allocations to stocks, as do
my model in-retirement bucket portfolios.
2
|
Confusing Risk Tolerance With Risk Capacity
Many retirees and pre-retirees are way out on the
other extreme: They’re equity true believers and don’t
see much of a role for anything
BUT
stocks in their
portfolios. This describes many baby boomer investors
I run into. They’ve had a good experience with
stocks over their investing careers, whereas bonds’
prospects seem downright questionable given the
headwinds of higher interest rates.
But it’s important to make sure you’re not confusing
your ability to tolerate risk—in this case, not
getting too bugged about equity losses—with risk
capacity, a much more important consideration.
Risk capacity refers to what sorts of losses you can
handle without having to meaningfully alter your
plans. For retirees who encounter big losses in equity
portfolios that they’re actively spending from, the
net effect is that less of their portfolios are in place
to recover when stocks eventually do. This can be
a big problem for a portfolio’s longevity, especially if
those losses occur early in the retiree’s time horizon.
That’s the reason that most in-retirement asset-alloca-
tion frameworks call for holding significant shares
of the portfolio in cash and bonds to meet in-retirement
living expenses in years when stock returns are poor.
They also call for reducing equities in a retirement
portfolio over time to reflect the fact that risk capacity
shrinks with an individual’s time horizon.
3
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Ignoring Your Behavioral Track Record
Yet, even as risk capacity should supersede consider-
ations about your comfort level with risk, it’s important
to take your past investing behavior into account
6 Big Mistakes to Avoid
in Your Retirement Portfolio
Portfolio Matters
|
Christine Benz