Recent changes within the stock market have been acting as a warning to certain Americans. Specifically, people who are too old to be investing the amount that they are in the stock market. Many of these people are, unfortunately, likely to dismiss that warning. See, surprisingly, the market actually rose during most of the pandemic. This, in combination with more than a decade of low yields for bonds, has led to many older Americans to invest much of their money in the market. However, this decision by these investors is being tested.
Investing in the stock market during your working years is one thing. However, an investment like that near or during retirement is another. Market downturns could lead to the depletion of your retirement nest egg. In the past weeks particularly, many major market indexes declined sharply. For example, intraday trading has led to the S&P 500 swinging by more than 3% on some days.
Why Do People Have Too Much in Stocks?
Investors will point to the relatively fast recoveries from the market drops that occurred in the 2000s and in 2020. They don’t see a better place to invest their money. But as you near (or enter) retirement, stock market volatility becomes more of an issue. This is because the older you get, the less time you have to make up for losses.
There’s a reason why some older Americans may be taking risks like this. They could have money coming in, in the form of paychecks such as pensions. Or, some people could be investing in stocks because they think the risk is worth a potentially higher return than bonds. Some investors might be looking to fund a retirement lifestyle that they couldn’t otherwise afford.
Many people began investing before the proliferation of target-date funds (funds that hold mixes of stocks and bonds, and become more conservative as investors age.) These types of funds are frequently used by investors in their 20s and 30s, and even early 40s. However, older generations don’t typically use this strategy, and are more of “do it yourself” investors. A recent article by the Wall Street Journal recommends that “investors who plan to retire by 2025 hold 57% of their investments in stocks.” But say that, unfortunately, “About 40% of 401(k) investors aged 60 to 69 hold 67% or more of their portfolios in stocks.”
The Wall Street Journal also warns “some investors are unaware that their portfolios are as heavily tilted towards stocks as they are.” Some investors “come in thinking they have a 60/40 portfolio only to discover it has drifted to 80% in stocks because equities have risen so much.”
What You Can Do
A number of news sources, the wall street journal included, recommend that you take steps to assess just how much risk you can afford to take. Furthermore, you should ensure that you keep with your desired stock allocation. One way of assessing your risk tolerance is the Rule of 100.
The Rule 0f 100 is a simple calculation you can do to determine your risk tolerance. It’s based on the idea that, the older you get, the less time you have to recover from losses. In turn, the less time you should put into riskier investments. Simply subtract your age from the number 100, and what’s left is the percentage of your portfolio that can be put into investments. For example: If you’re 65 years old, 100 – 65 is 35. This means 35% is the maximum amount of your income that can be put into risky investments like stocks. The remaining 65% of your portfolio should be kept safe in much more secure accounts.
Keeping Your Money Safe
And, on the topic of more secure accounts, there are quite a few options for keeping your money safe. You could keep your savings in a traditional retirement account such as a 401(k) or IRA. Alternatively, you could reach out to us at Cornerstone Wealth and Tax Advisory. We can discuss alternative options for keeping your money safe, such as IUL insurance policies and annuities. Contact us to learn more.
Another important step to keeping your money safe, as we mentioned earlier, is paying close attention. To quote the Wall Street Journal again, “Have a systematic approach, and follow it.” You don’t want to end up finding out that more of your money is invested in stocks than you expected.
Are you looking for alternative ways of increasing your retirement nest egg, without putting your money at risk? Reach out to Cornerstone Wealth and Tax Advisory to learn more. We’re here to help.