(PUB) Investing 2016

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6 Big Mistakes to Avoid in Your Retirement Portfolio Portfolio Matters | Christine Benz

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. 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 | 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 But it’s important to make sure you’re not confusing your ability to tolerate risk—in this case, not

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 | 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.