If you haven't checked your portfolio lately, you may be taking big chances with your retirement security.
1. Have you rebalanced your portfolio over the past five to six years? Since the market’s trough in early 2009, stocks have racked up a total return of more than 250%, nearly eight times the 33% gain for bonds. Which means if you haven’t rebalanced your holdings or taken other steps to restore your portfolio to its target asset allocation (such as investing new money in lagging holdings), you could be sitting on a higher-octane mix than you realize.
For example, someone who had a portfolio that was invested 60% in stocks and 40% in bonds in March, 2009 and simply let it ride without rebalancing over the next six or so years would be sitting on a portfolio of roughly 80% stocks and 20% bonds today. For a sense of just how more volatile an 80-20 mix is than a 60-40 portfolio, consider: From the stock market’s high in 2007 to its 2009 low, an 80-20 portfolio would have suffered a loss of more than 40% vs. a loss of just under 30% for the 60-40 mix (assuming no rebalancing).
Of course, if you failed to rebalance but added or pulled money from your portfolio over the past six-plus years, you could end up with a more, or less, stock-intensive portfolio than the example above, depending on what investments you added or which parts of your portfolio you drew from. But without a conscious effort to maintain your target asset allocation, it’s easy for a portfolio to become much more aggressive over the course of a long upswing in stock prices.
2. Have you been funneling more of your savings into stocks as the market has climbed in recent years or found yourself more eager to make volatile investments? When the market is on a long surge, many investors are willing, if not eager, to invest more aggressively than they otherwise might. Some researchers believe that’s because we’re simply more comfortable accepting more risk when stocks are risking. Others say that’s nonsense. Our appetite for risk hasn’t changed; we just underestimate the level of risk we’re taking when things are going swimmingly.
Regardless of which side is right (I tend to side with the latter group), the point is that during bull markets you may be tempted to load up more on stocks and/or jump more readily than you would in less ebullient times into high-flying sectors that are leading the market, like health care and technology this year. But this tendency has two downsides: It can leave you with a portfolio that’s more “di-worse-ified” than diversified as you add more and more investments to your roster; and it can lead to greater losses if the market’s sizzle turns to fizzle.
3. Have you assessed your risk tolerance lately? The only way to really know whether the risk level of your portfolio jibes with your true tolerance for risk is to take a risk tolerance test. For example, answer the 11 questions in Vanguard’s free risk tolerance-asset allocation questionnaire and you’ll get a recommended blend of stocks and bonds based on, among other things, what size loss you feel you could handle without jettisoning stocks and how long you intend to invest your money. An Australian firm that measures investing risk, FinaMetrica, offers a more rigorous 25-question risk profile questionnaire that grades you on a scale of 0 to 100, comes with a detailed report and also suggests a portfolio mix. The cost: $45.
After completing such a test, you can then compare the suggested portfolio with how your savings are actually invested—and, if necessary, take steps to bring your holdings in line with your investment goals and tolerance for risk. While you’re at it, you may also want to do a quick portfolio check-up to make sure you know exactly how your portfolio is divvied up among your various holdings and what you’re paying each year in management and other fees. And if you want to get really ambitious, consider subjecting your overall retirement plan to a stress test so you’ll have a sense of how a severe market setback might affect your retirement prospects.
Or you can do what many investors do and put off dealing with these issues until a major downturn is underway. In which case, your options for stemming the damage to your portfolio—and your retirement security—will be limited.
Walter Updegrave is the editor of RealDealRetirement.com. If you have a question on retirement or investing that you would like Walter to answer online, send it to him at firstname.lastname@example.org.
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