“When can I stop taking any market risk?”
Is there a magic number—an age or dollar amount—at which point I can avoid market risk altogether?
It would be nice if there was a milestone number—one that, upon reaching it, marked you as “old enough” or “rich enough” to quit the equities-owning game for good.
As retirement age becomes more of a concrete date in your calendar than an abstract time in some misty future, your first instinct may be to preserve your assets—and shield your nerves— from any more ups and downs. Once you stop earning, the impulse to jealously cling on to what you have can be strong.
That may make sense for multimillionaires; for those with more modest means, taking on some level of risk can potentially provide arms in the battle against inflation and dwindling purchasing power. In other words, growth-oriented investments remain a small but essential ingredient in the average portfolio.
Letʼs say you have a million dollars saved up: By most standards youʼre well off. If you can comfortably live on 4% of your total assets per year (a general rule of thumb) then you can focus fully on preserving as opposed to growing, your assets.
But hereʼs the reality: Even if youʼre sitting on a million, which on the face of it sounds like a lot, remember that 4% living budget equates to just $40,000 per year (and thatʼs before tax!). Even with Social Security benefits added on, thatʼs simply not enough to support the kind of retirement most middle-class Americans have in mind.
Few people approaching retirement are wealthy enough to put everything into (say) TIPS—
Treasury inflation protected securities—which strive to preserve your principal as well as your purchasing power. The remainder of us will look to keep growing at least a portion of our money in order to avoid outliving it.
Uncertain events: An inevitable certainty
Among lifeʼs many uncertainties, one that can be particularly trying to the nerves is if the market takes a turn for the worse. (And after the run of year-on-year growth weʼve experienced since 2009, a market correction seems ever more imminent). The key to surviving a bad market neednʼt involve converting an underground bunker (as some Silicon Valley billionaires are) but rather, in constructing a properly balanced portfolio.
In Part 2 I look ahead to the (re)balancing act that even the nervous Nellies out there may want to follow through with past retirement—distributing assets between three general buckets, including one for potential growth.
There is no guarantee that diversification or asset allocation reduces risk or increases returns. No strategy can eliminate or anticipate all market risks and losses can occur when investing.
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