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WHEN I STARTED investing, I never thought much about risk, partly because I didn’t recognize that there were any.
The investor questionnaires always placed me in the aggressive category. Even though I never ventured much beyond mutual funds, all were pure stock funds, except for a small position in a balanced fund that I briefly owned. I didn’t know much, but I had learned that stocks most likely meant growth over the long haul, and that’s what I wanted.
Around age 50, I added some bond funds, but they were less than 10% of my total holdings. A few years later, on the advice of a fee-only financial planner, I moved more money into bonds, but my heart wasn’t in it. My allocation to bonds remained at less than 20%. Still, I thought I should take the advice I’d paid for.
I had read about risk tolerance, and of the danger that investors find out too late that they weren’t as brave as they imagined. I understood that panic selling after a large market drop would be devastating to retirement savings, but I couldn’t relate. I had experienced a few declines since I started investing in 1998 and, while not fun, I never considered selling. Even so, I mentally filed the information away, knowing I had been humbled by hubris before.
Sure enough, the early 2020 pandemic crash brought a new attitude. My head and my hands executed what I had learned were the right moves. I bought stocks, but I was also stung by my losses. This may have been compounded by the turmoil in my health care job. The seed of a new emotion was planted, but it barely had a chance to germinate because the market came roaring back.
The rapid recovery and upward march of stocks after the 2020 crash was exciting. Checking my account balance was fun. But it also got me to look more closely at my retirement plan. I was five or six years from retirement. As my last year of work approached, I had planned to move gradually from stocks to short-term bonds and cash. I wanted to wind up with about five years of spending money that was protected from a stock market drop.
But then that unfamiliar emotion, which had cropped up in early 2020, began growing again. It felt like my time horizon had suddenly shortened. After years of being a distant goal, it seemed like retirement was upon me. As the market rose through 2020 and into 2021, so did my uneasiness.
There were other considerations, too. I liked my work, but I had begun yearning to spend at least some time on other pursuits. Also, my wife and I both had mothers over age 90 living semi-independently at home. I could envision a need to commit more time to them. On top of that, my wife had a brother in assisted living who already required more time than we could really afford to give.
The upshot of all this rumination: My wife and I decided to move some of our future retirement spending money out of stocks immediately, rather than doing it gradually as my planned retirement age approached. Even so, 70% of our portfolio is still invested in stocks. We aren’t ready to fully retire. As long as things remain calm on the home front, our plan is to keep working and buying more stocks. But we wanted enough flexibility to handle an unexpected change in income over the next few years.
I can’t claim that our decision was purely logical. But taking some risk out of our portfolio took some tension out of our lives.
Did we make the right move at the right time? Looking back through the sunshine, I can see that stocks continued to grow after we sold—even after factoring in this year’s decline—and we missed out on some of that growth. We couldn’t have predicted that at the time, as we peered through the fog into the future. But I can tell you that today I’m glad we took some money off the table.
Ed Marsh is a physical therapist who lives and works in a small community near Atlanta. He likes to spend time with his church, with his family and in his garden thinking about retirement. His favorite question to ask a young person is, “Are you saving for retirement?” Check out Ed’s earlier articles.
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Ed, I agree with you. We are a year away from retirement but I am 100% invested in index funds because we will be collecting two pensions and two S.S. incomes. But I’m thinking my indexes should be a little more conservative stock categories
The author would probably enjoy Larry Swedroe’s book Risk of a Black Swan or Wade Pfau’s research on his blog on rising equity glide paths. Both advocate a sudden move to an 80% bond allocation to reduce sequence of returns risk at the beginning of retirement.
I retired in 2010. One thing I learned quickly was that my perspective on risk changed significantly after retirement. I planned to retire in 2008 but when the Great Recession hit, I decided to work longer to recover my losses.
Once I did retire, I realized my accumulation phase was over, and market losses would have to be recovered by market gains. I did not anticipate my change in risk and do not recall any of the retirement experts warning of that, but for me it was real.
While “safe money” does lose ground to inflation, it’s still wise to have that cushion. Having such funds set aside has helped me stay course in the current market downturn.
You, your wife, and I all sleep better (not together) with this strategy.
To your point, M Plate, I’m reminded of Warren Buffet’s line about cash: “Cash is like oxygen – it’s taken for granted until there’s not enough of it.”