Don’t Let the Market Say When You Can Retire – Portfolio Management Near Retirement


There is an old rule for allocating funds between stocks and bonds.   It says that one should hold a percentage of stocks equal to 100 minus his age, and the rest in bonds (or equivalently, hold a percentage of bonds equal to his age and the rest in stocks).    For example, an individual who was 40 years old would have 40% invested in bonds and 60% in stocks.

Note that the term “stocks” really refers to more volatile, growth type investments. This would include smaller companies that pay little or no dividend and tend to have a high beta (large fluctuations), but that can be expected to have relatively high returns if held for a long period of time.  The term “bonds” refers to more stable investments that tend to pay a good dividend or interest payment, and would include high quality corporate bonds; treasury bonds; preferred stocks; common stock in mature, stable companies; and REIT’s.

The idea is that when one is young and can afford to take risks, more money should be in investment vehicles that offer the potential for higher returns. This is both because the younger investor can better suffer a loss and because the he/she has time for his/her investments to mature. As the investor ages and can less afford to take risks–and when more current income is needed from the investment account– money is shifted into investment vehicles that should not be affected as much by market events. These investments primarily provide return through dividends and interest so that the holder can still receive income during downturns.

During the stock market fall 2008, I heard several people say that they had planned to retire, but now would continue working because their 401k balances had fallen so far.  Because the bond funds held up reasonably well even though the stock market was down around 50%, if these people had been following the rule, they would have only lost about 20% (65 years = 35% stocks, 50%*35% = 18% loss).  They could have therefore gone on and retired since they would be able to live on income from their bond funds while waiting for the stock portion of their portfolio to recover.  In fact, when they rebalanced the account, they would have sold some bonds and bought more stocks (to regain the correct percentages of stocks and bonds) and actually done really well in the recovery than ensued.

As a final note, the rule-of-thumb was created when individuals weren’t living or working as long.  It should therefore be adjusted if one is planning to work longer or has a large enough account to suffer a more significant loss without affecting his plans.  For example, an investor with $15 million could afford to lose 20-30% of her portfolio and still have plenty of money to live on.   If this is the case, a greater percentage of stocks can be held than recommended.

Another exception would be if bonds were very expensive and paying very low-interest rates (because interest rates overall are very low), in which case it might make sense to wait for bond prices to fall a bit before rebalancing an account.  The main point is to gradually shift from the volatile investments to the more stable ones as one’s investment horizon begins to shrink.  Don’t let an unexpected market move force you to change your plans for retirement.

Please contact me via vtsioriginal@yahoo.com or leave a comment.

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Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

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