A rule of thumb holds that as investors get older, they should shift their portfolio weightings away from stocks and toward bonds.
The idea is to lower risk and increase reliable income to fund retirement spending. But many older investors apparently didn’t get the message.
Almost half of Vanguard 401(k) investors over 55 who actively manage their money have more than 70% of their portfolios in stocks, according to The Wall Street Journal. That compares to 38% In 2011.
Among older seniors with taxable brokerage accounts at Vanguard, nearly one-fourth of those aged 75 to 84 have almost a 100% weighting in stocks. And the total is one-fifth of investors 85 and up.
We spoke to the San Diego independent financial adviser Mick Heyman about what’s responsible for this trend and the ramifications. Here’s what he had to say.
TheStreet.com: Why are older investors keeping more money in stocks?
Heyman: Some of it is taxes. If you’ve owned big names, such as Apple (AAPL) -), for a long time, you’d have massive gains. And you’d have to pay capital-gains taxes if you sold them, assuming they’re in a nonretirement account. If you originally had 60% to 70% of your assets in stocks, maybe you’re now at 70% to 80%.
Also, five years ago it made sense to move from low-yield money-market funds to solid stocks with yields up to 3%, such as Procter & Gamble (PG) -).
The most important objective for seniors is income. If you don’t need more income and think you might live a long time, why not grow your stock allocation [for the larger historical gains of stocks over bonds]?
Mick Heyman/TS
TheStreet.com: What about seniors who need more income and want the higher historical gains of stocks to fund that need?
Heyman: That could work. But you have to have the risk tolerance for it. If you’re OK with a 10% to 20% drop in the stock market, that’s fine. But a lot of people panic when things go down. And when stocks fall, you’ll be liquidating a higher percentage of your equity portfolio to finance the same amount of spending.
Of course if you have a $10 million investment portfolio, who cares? [That’s because a low allocation to fixed-income may be sufficient to finance your spending needs.]
TheStreet.com: You’ve touched on this already, but is it a good idea for seniors to have a high weighting in stocks?
It can be. My first client cared just about income and lived happily with nearly 100% of her assets in stocks. She had stocks with solid and rising dividends to provide the income. It was more than enough for her spending. She was worth about $2 million in 1980 [$7.4 million in today’s dollars].
All she wanted to do was go out for lunch wither her friends and give money away. There was no reason for her to take capital gains.
The most important thing is income. Do you have enough based on your allocation and the potential volatility in stocks to finance your spending if you live as long as possible.
Then there’s risk tolerance. No matter what kind of stock decline comes, you want to have the fortitude so you don’t sell into that decline.
Given [that[ stocks are near 10% of their record highs, now is a good time to get to allocations that are comfortable for you. If you have too much of your money in stocks, you can lock up a 4% yield with 10-year [treasury securities].
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