Recent changes in the stock market have acted as a warning to some Americans. Importantly, Americans who are too old to be investing the amount they have in the stock market. Many of these individuals, unfortunately, will likely ignore that warning. You see, the market surprisingly rose during the pandemic. This, combined with more than a decade of low yields for bonds, caused many older Americans to invest much of their money into the stock market. In fact, “Almost 40% of investors age 60 to 69 hold about 67% or more of their portfolios in stocks,” says the Wall Street Journal.
Now, investing in the stock market in your working years is one thing. However, a risky investment like that near or in retirement, however, is another. Market downturns may lead to the depletion of their retirement nest egg. This decision by some investors to keep so much in stocks is being tested right now. In the past weeks, most major market indexes have declined sharply. Intraday trading has led to the S&P 500 swinging by more than 3% on some days.
Why Are People Investing in Stocks so Much?
Many people point to the relatively quick recoveries from market dops that occurred during the 2000s and in 2020. These people don’t see a better place to invest their money. But market volatility is an issue, especially as you get older. The older you get, the less time you have to make up for losses.
There’s a reason why some of these older Americans may be taking risks like this. They might have money coming in in the form of pensions or other paychecks. Or, some people may be investing in stocks because they believe the risk is worth the higher return than bonds. Some people may be looking to fund a lifestyle in retirement that they couldn’t afford otherwise.
Many baby boomers began investing long before the proliferation of target-date funds (funds that hold mixes of both stocks and bonds, which become more conservative as investors age.) These types of funds have been very useful to investors in their 20s, 30s, and early 40s. Older investors, however, are much more likely to be more of “do-it-yourself” investors.
“Investors who plan to retire by 2025 [should] hold 57% of their investments in stocks,” says the Wall Street Journal. However, “About 40% of 401(k) investors age 60 to 69 hold 67% or more of their portfolio in stocks.” The Wall Street Journal also warns “Some investors are unaware that their portfolios are as heavily tilted towards stocks as they are.” Some investors “come in thinking they have a 60/40 portfolio only to discover it has drifted to 80% in stocks because equities have risen so much.”
What You Can Do Differently
Many news sources, including the Wall Street Journal, recommend that you take steps to address how much risk you can afford to take. One way of assessing your risk tolerance is the Rule of 100.
The Rule 0f 100 is a simple calculation you can do to determine your risk tolerance. It’s based on the idea that the less time you have to recover from loss, the more conservative you should be with investments. Just subtract your age from the number 100, and the difference is the amount of your portfolio that can be put into riskier investments. For example: If you’re 65 years old, 100 – 65 = 35. This means 35% of your portfolio can be put into riskier investments. the remaining 65% of your portfolio should be kept in more secure accounts. Of course, depending on your situation, you may want to keep even more of it safe. Or, you may not want to invest any of your money at all.
There are many places where you can put your retirement savings to keep the money safe. You could use a traditional retirement account such as a 401(k) or IRA. Alternatively, you could reach out to Retallick Financial, about the possibility of purchasing a product like an annuity, or IUL insurance policy. Contact us for more information about these types of products.
Another important step to take when it comes to keeping your money safe? Paying close attention. As we said earlier, you want to ensure you’re sticking to your desired stock allocation. Only around half of the individual investors bother with keeping up with this. To quote the Wall Street Journal again, “Have a systematic approach, and follow it.”
Interested in finding alternative ways of increasing your retirement nest egg, without putting your money at risk? We can help. Reach out to us at Retallick Financial to learn more.