''In General'' May Not Apply to You
A while back, an article about common mistakes retirees make ran next to mine. It included a guideline to determine what percentage of stocks should be in your portfolio. According to the author, investors should subtract their age from either 120 or 110, and the resulting number will give you the percentage. So, based on this idea, all 60-year-olds should have between 50 and 60% of their portfolios invested in stocks.
While this is a good starting point for discussion, in the real world this may not be close to the truth for you.
Just because you are of a certain age, does that mean you will react in a certain way? A general rule is exactly that—a generalization. It doesn’t take into account the emotions of the people involved. What happens when the market drops 20, 30 or even 55%? Some people with over half of their portfolio in stocks may panic and start selling because they just can’t stomach watching those losses. Even if you used the age-based formula as rationale to keep them from leaving the market, their tolerance is so low that they can no longer see logic.
That is one reason it takes more than simple formulas to build portfolios. An individual’s tolerance for risk must be taken into account. We collect risk analysis studies from our clients through Finametrica for an objective tolerance assessment (go to myrisktolerance.com/home to order your own for $45), but we also get to know our clients. What have they done financially in the past? Based on what is happening in their lives right now, how are they likely to react to their portfolios gaining or dropping? And then there are the intangibles that often can only be discerned by listening to my gut.
You should do the same when looking at your own financial situation. Your dream retirement may cost less than that of your neighbor’s. If so, you may be able to afford a more conservative combination of investments. If your gut’s been telling you you’re taking unnecessary risks, this may feel pretty good.
I know I like to feel pretty good, and I’m sure you do, too. The average person does. Now, these kinds of assumptions don’t work for everything, including the mix of investments the “average” 60-year-old should have. Sixty-year-old Tom may be looking at a large withdrawal for the RV and house boat he and his wife will use for his dream retirement in 7 years, while Bob at 60 has to plan to pay for a college education for his 10-year-old daughter. People’s lives take many different paths. Don’t assume your road to retirement can be calculated with just one average formula.
This article was published under the title "Average formulas may not be best plan"
in the Wichita Falls Times Record Newson (2/26/2012)
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