Kiplinger | Retirees are Loading Up On Stocks: Is That Wise or Risky?
Many older savers are breaking the “golden rule” of retirement investing. Is your 401(k) taking on too much risk? Here’s what you can do.
Overconfidence. It’s not uncommon during bull markets, when market returns are strong, for behavioral biases to impact decision-making, says James Demmert, chief investment officer at Main Street Research. Overconfidence can cause investors to let their money ride when stocks are performing well. “As bull markets mature, investors gain more confidence,” says Demmert. “Optimism turns to excitement as the market continues to go up, and they start feeling really smart.”
Market appreciation. The mere fact that stock prices are rising can push a stock allocation above its recommended weighting. And if an older investor is managing their own money (which Fidelity says many do) and isn’t regularly rebalancing their portfolio to keep their stock and bond weightings aligned with their financial plan, those weightings can easily get out of whack. “Just the market going up can take somebody from 50% stocks to 60% stocks,” says Demmert.
Suffering outsized losses. The more stocks a retiree holds, the more money they can lose if the stock market suffers a steep decline, Demmert warns. “When these really terrible markets occur, or a bubble pops, the people that can least afford the losses — retirees — are the ones that get hurt the most,” says Demmert.
Sell into rallies. When trimming stock exposure, take advantage of big up days or periods when the market is climbing, says Demmert. You can also set up a regular distribution schedule, such as monthly, until your allocation is back in line with your targets. “Dollar cost average out of the market,” says Demmert. This selling strategy helps smooth out market volatility, so you don’t get spooked into selling at a market low. “That tends to work psychologically for most people,” says Demmert.
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