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Why it’s important to still own stocks at retirement — even now

By March 10, 2020Uncategorized

As coronavirus anxiety grips the markets and knocks the S&P 500 index (^GSPC) as much as 18% off its February highs, it’s scary times for any investor, even one with long-term goals.

Looking at Twitter and other social media platforms, there’s a lot of really great advice aimed at investors that mirrors the conventional wisdom of everyone from financial advisors and planners to people like Warren Buffett and Jack Bogle. Investment brokerages like Fidelity and Vanguard are trumpeting this loudly.

The advice is essentially, if you’re a long-term investor, you probably want to stay the course.

I’ve seen this advice repeated significantly, but often with the caveat, “unless you’re near retirement.” While that view is probably designed to be more inclusive (i.e., most people should follow it), it does a disservice for those near retirement. Advisors usually recommend a portfolio filled with plenty of stocks for those people too.

A screen above the floor of the New York Stock Exchange shows the closing number for the DJIA, March 9, 2020.
The Dow Jones Industrial Average sank 7.8%, its steepest drop since the financial crisis of 2008. (AP Photo/Richard Drew)

 

The idea of glide paths is a key principle in retirement planning. You start with a lot of stocks when you’re young and retirement is far off —  some, like T. Rowe Price, even say 98% of your portfolio should be in equities; and as you get older, you transition to less volatile investment products like bonds and cash. Less reward, sure, but you want to risk less because you may not have time to wait for a recovery.

But this does not mean no stocks, or even a majority bond portfolio.

A target date fund does not go to 0% stocks at retirement

Let’s look at a typical target date fund, a one-size-fits-all product for someone who wants the diversification to be automatic and full-service. Though they start out almost all stocks, they shift away from stocks slowly.

For someone who’s near retirement, the breakdown is often very much majority stock. Vanguard’s 2020 target date fund (VTWNX) holds 55% stocks and 45% bonds – so someone planning to retire this year is certainly exposed to the stock market. There’s a good reason for that: People are living longer and longer, and portfolios need to last.

A retirement portfolio isn’t supposed to be a savings account to draw from. In your retirement, it’s supposed to balance stability (for spending) with at least some growth (to maximize the nest egg).

Being appropriately diversified means you shouldn’t have to make moves when the market tanks. That’s why target-date funds don’t change their glide paths very often.

So if you’re near retirement but you’ve been scared by the sell-off, take a deep breath if you’re diversified.

As Vanguard CEO Tim Buckley said in a video posted on the company’s website, you have a strategy for a reason.

“An investment plan established during calmer times should not be abandoned in the midst of a market downturn,” he said. “ Let the benefits of diversification play out.”

And that diversification? Unless you can spend cash until you die, that probably means diversifying with the stock market — not just with bonds and cash.

 

Ethan Wolff-Mann, Senior Writer | Yahoo Finance