Should I reduce the stock portion of my portfolio as I near retirement?

Volume is one advantage that professional advisors enjoy. I encounter people every day who have experience and opinions about finance and investing. Some of them are as knowledgeable about stocks, bonds, and economics as members of my own professional team.

What they lack, though, is a broader perspective. They’ve read articles, studied their budgets, browsed the internet, talked with a few friends and family. All good, but sort of isolated in a small bubble of similar situations, time horizons, and ideas. If most your knowledge base comes from these past ten years, that’s a serious limitation on your ability.

A seasoned professional is one way to combat that. Simply, any advisor worth consulting has worked with hundreds of clients, diverse needs, and widely-varied economic climates. No guarantees, but the perspective offered is necessarily broader than your own.

There’s one old (powerful) idea that helps makes this point. It’s very common to hear that you should reduce or eliminate portfolio risk as you near retirement or when your portfolio is large enough to meet your needs. Or, as they say in football, take a knee when you’ve already won the game. This idea sounds great and, since many people are risk-adverse anyway, it encourages them to do what they already want.

But it might not be what is best. I don’t recommend that anyone liquidate a long-term portfolio and take a knee. My recommendation would be to reduce risk assets, perhaps, but maintain a modest portion as an inflation hedge and for a few other reasons. Many advisors recommend 25-35 percent in longer-term (5+ years) portfolios. Liquidity needs and potential taxes must be considered, too.

That very common idea of eliminating risk requires more thought today.

The first point I’d make is that portfolio time horizons often run longer than people predict. So, the guy contemplating retirement at age 60 might assume that his $1 million IRA is sufficient to fund retirement. He’s likely not thinking that he’ll need income for 30+ years. Keep it in a conservative, balanced portfolio and he might draw an inflation-indexed $40,000 per year for life. Shift it to bank certificates or money market funds and he’ll gradually lose ground from year-to-year. The problem is less severe for someone at age 80, but it could still be a factor over another 15 years.

Another point is that market risks are less than they seem for periods longer than 5 years. While anything might happen during the next 5 years, the 5-year investment outcome is more predictable than people think. So, most times, people with 5+ years in their investment horizon will do better than they fear. Importantly, many people at age 80 or 85 still have a time horizon of 5+ years.

Third, even a small amount of portfolio “risk” adds significant compound returns. It’s one thing to say, “we don’t need any more money,” but possibly another to deprive others. Heirs, charities, and other causes will gladly accept more when that day comes. Another way of saying this is that those parties might receive a gift diminished by inflation if you are too conservative with investing.

Comfort is important in retirement and portfolios should be tuned to your targeted risk level.

Yet, too little risk can be as damaging as too much. With longer lives, broader perspective, and better understanding, many old ideas require new attention. The notion of eliminating portfolio risks in retirement sounds good, feels good, and may garner praise from some of your friends and family. My considerable seasoning says to give this idea a bit more thought.

This isn’t meant to disparage the fundamental idea of adjusting risk in your golden years. These are nuances to be considered as you think about retirement investing. And they are likely nuances that rise from outside your personal knowledge bubble.