Some Gain, Less Pain

WHAT’S THE BIGGEST threat to your retirement?

For young adults, we know a key pitfall is failing to invest in stocks because they’re so afraid of the market’s short-term ups and downs, thus unwittingly risking impoverishment later in life.

But for those of us nearing retirement, the market’s ups and downs can start to matter more than stocks’ long-term inflation-beating performance. An ill-timed market crash or a run of bad annual returns could ruin our retirement plans.

What to do? That depends on a host of factors, including your nest egg’s size, your ability to work longer if necessary, and the potential income and satisfaction you might derive from part-time work once you leave fulltime employment. There’s a point at which you should strive for growth and a point at which you should focus on conserving wealth—but those points will be different for each of us.

My late mother had a decent-size portfolio. But during the final 15 months of her life, which spanned 2020-21, she required round-the-clock home health aides at a cost of $220,000 a year. We had no idea how long those expenses would go on. Mom, to her credit, had never before touched her portfolio. But during that 15-month stretch, I was forced to sell some investments at inopportune times on her behalf.

Her end-of-life health care costs were a wakeup call for me. If you’re far short of a multi-million-dollar portfolio, like I am, you may have little choice but to continue living on a tight budget for the remainder of your working years, while also investing mostly in stocks.

I know some say I should start traveling more now, while I have my health and can still get around. But I’m not earmarking a lot of money for overseas adventures. Maybe I’ll do one trip every three years or so. That’s despite the fact that, with my hip in need of possible replacement, I can imagine a future where strolling through the old town of a foreign capital will be painful. But at the same time, I also see the news of people dying who weren’t much older than I am now.

My caution today is the price I pay for ruining my finances in my 40s, when I devastated my portfolio by making risky investments using margin debt. I don’t get the three-week Europe jaunt, at least not yet. I could probably spend more, but it isn’t my goal to die broke. If possible, I’d like to leave an inheritance to my two children.

In the meantime, I still need growth. I’m 62, and I hope and plan to work for another five years or so. I may be able to work even longer, if that proves necessary. My profession—writing and editing—lends itself to part-time work in retirement, even with my arthritic joints.

There are ways to get more conservative while investing for growth. I have about 72% of my portfolio in stocks and stock funds, though I’m planning to reduce that by one or two percentage points a year. That would still leave me with more than 60% in stocks at my planned retirement age, which is perhaps somewhat aggressive.

I wrote earlier about how I’m increasingly limiting risk in my bond-market money. Within my stock holdings, I’m also trying to reduce risk, but that’s easier said than done.

I’m diversified across U.S. and foreign stocks. I also have a little extra in energy and defense stocks as a hedge against events that could drive the broad market lower. I’m intentionally minimizing exposure to China, as I’ve written here and here. Partly as a result, I’m light on emerging markets.

In addition, I lean toward a value investing style, especially small-cap value. I consider limiting exposure to high-priced mega-cap tech stocks—which today dominate the S&P 500-stock index—as a way to reduce risk. Indeed, true market-capitalization-weighted index funds only account for half of my portfolio.

Unfortunately, other investors seem to be seeing more risk in small-cap value right now than in technology, partly due to fears about a recession and the banking sector. But I’m sticking to my value tilt. Still, there are risks in waiting for value to return to favor and deliver a multi-year period of outperformance. Investment styles can lag badly for many years, as value has, and my plan is to gradually move closer to complete market-cap indexing as I get older. Moreover, value stocks aren’t immune to market collapses. Sometimes, they don’t hold up much better than growth stocks, if at all.

My approach paid off in 2020-22, a big improvement over my previous track record. My losses were well-contained last year. But with growth taking off again this year and value far behind, I’m fearful I’ll miss the boat again by not fully indexing.

Maybe I’m living my own variation of Daniel Kahneman’s Prospect Theory, which states that we hate losses twice as much as we love gains. I’d rather lag the market on the upside than be fully exposed to today’s glamour stocks and the danger that there’s a bubble about to burst. Telling myself “I told you so” would be unbearable.

William Ehart is a journalist in the Washington, D.C., area. In his spare time, he enjoys writing for beginning and intermediate investors on why they should invest and how simple it can be, despite all the financial noise. Follow Bill on Twitter @BillEhart and check out his earlier articles.

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