Older investors have a lot of money in stocks. How to check if it is too much. – The Wall Street Journal

The heavy equity allocation breaks with conventional wisdom, which calls for moving from stock-heavy portfolios when you’re younger to a more balanced mix of stocks and bonds in retirement. The goal is to reduce the effects of a bear market during pullbacks, a combination that can deplete a nest egg.

The decision of older investors to hold so many stocks is currently being tested. The major stock indexes all fell sharply last week, with the Nasdaq Composite entering a correction. Intraday trading has seen the S&P 500 swing more than 3% on some days.

Despite the sell-off and volatility, baby boomers, born between 1946 and 1964, seem unlikely to oversell their stock portfolios, advisers and other financial planners say. They say many older Americans are emboldened by the relatively quick recovery from the bear markets of the early 2000s and 2020s. And many people still don’t see anywhere else to invest smartly.

“Some feel almost confused about the volatility of the stock markets,” said Paul Auslander, an adviser in Clearwater, Fla., who advises clients to stick to long-term financial plans. “But they are getting older and they have less time to make up for losses.”

Some older Americans may take an aggressive approach to investing because they have money from pensions or a paycheck that covers much of their spending needs.

Other people seem to be rolling the dice on stocks for a higher return than bonds to support a lifestyle they couldn’t otherwise afford, advisers say. With bond yields low, some are stocking up on stocks that pay high dividend yields to generate retirement income without draining capital.

One factor at play: Many older Americans are responsible for their own mix of investments.

Many baby boomers began investing long before the proliferation of target maturity funds, which hold diversified combinations of stocks and bonds that become more conservative as investors age. While these funds have taken off among investors in their 20s, 30s and early 40s, baby boomers are much more likely to be self-directed investors, said Kirsten Hunter Peterson, director of thought leadership at Fidelity.

In its target date funds, Fidelity recommends investors planning to retire by 2025 hold 57% of their investments in equities. Currently, about 40% of Fidelity 401(k) investors between the ages of 60 and 69 hold 67% or more of their portfolios in stocks, according to Fidelity. Among investors aged 70 and over, nearly half hold equity allocations at least 10 percentage points above Fidelity’s recommendation.

Some investors are unaware that their portfolios are as heavily biased toward stocks as they are.

Mr Auslander says he has encountered potential clients “who come in thinking they have a 60/40 portfolio only to find it has drifted 80% into stocks because stocks have gone up so much”.

For investors who are now wondering what to do, there are several steps to take now.

William Bernstein, an independent financial advisor based in Eastford, Conn., recommends assessing how much stock market risk you can afford to take.

For example, a 65-year-old with a life expectancy of 25 years who spends 2% of his $1 million portfolio per year, or $20,000, can afford to invest and lose significantly more in stocks than someone who needs a 5% cashout, or $50,000 a year.

Anyone needing these larger withdrawals should own no more than 50% of the shares, Bernstein advises.

One way to gauge your comfort level with stocks: calculate how much money you would have left if you were to invest your desired allocation in stocks and experience a sell-off of around 50%, which may occur once or twice a year. generation,” Bernstein said. Consider someone with a $1 million portfolio who is aiming for a 4% withdrawal, or $40,000. If the investor decides to put 60%, or $600,000, in stocks, the next step is to think about what it would be like to lose half of that money.

If this calculation makes you uncomfortable, Bernstein recommends reducing the equity allocation. Once you have decided how much stock to hold, sell immediately to achieve your desired stock allocation.

“Just bite the bullet,” Mr. Bernstein said. With the S&P 500 having averaged an annual return of more than 10% over the past decade, “it’s not a bad time to take profits.”

Mr. Auslander says to make the sale in a 401(k) or Individual Retirement Account, since taxes are deferred until the money is withdrawn. In a taxable account, you will be liable for capital gains tax on profits.

The other big step is to continue to be careful, at least a little.

Rebalancing, or periodically skimming profits from winners and investing profits into losers, can help you stick to your desired stock allocation. According to Vanguard, only about half of individual investors bother to rebalance regularly.

Rebalancing once or twice a year makes sense for most people, Bernstein said, because doing it more often can be inconvenient. Waiting longer than a year can expose the portfolio to the risk of straying too far from target allocations.

“Have a systematic approach and follow it,” said David Blanchett, head of retirement research at PGIM, the investment management group of Prudential Financial. Inc.

Write to Anne Tergesen at [email protected]