Not long ago, when our American colleagues on Morningstar.com asked users whether they were playing defence or offense with their portfolios, many responses were contextually grounded in their life stages. That is, their portfolio stance was not so much determined by market conditions as it was by their own goals and needs. This was especially true for those who were in or nearing retirement.
The following week, they posed a question on their discussion board directed to this particular demographic of investors to better understand how they were approaching risk. Did they deem losing money or not making enough the more unfortunate scenario? The forum contains valuable insights from the retired and soon-to-be-retired alike. Below is a sampling of responses.
Safety first
For many of you, preserving your nest egg is priority one. ColonelDan writes, "Since retiring, my priorities have gone from growth and preservation during my accumulation years to preservation and growth in my distribution years. I now subscribe to the philosophy of: If you've won the gold buckle in the rodeo of life, why continue to ride the bull? Why take on the additional risk of losing what you have when you don't have as many years to recoup and what you have now is more than sufficient to meet your needs, plus some? Given that, I seek to preserve my nest egg and conservatively grow it only to stay ahead of inflation."
Similarly, dcontroe notes, "When I was younger with many years ahead of me, not making enough money was most important. Now that I am older with fewer remaining years, not losing money is more important. Preserving assets accumulated is much more important with advancing age."
Taylor Larimore takes a slightly different approach to preservation: "Most investors think about probabilities. Wise investors also consider consequences. This means that as we approach retirement our stock allocation should be limited to what we can afford to lose."
Eyeing the rear-view mirror had shaped Palmreader's stance on the issue: "With the experience of September 2008-March 2009 still very fresh in mind, I can say without hesitation that losing a great deal is infinitely worse than not maximizing gains."
Focus on what you can control
Several user comments highlighted the importance of focusing on what you can control during retirement, including your investment-related costs as well as your living expenses. As user James57 noted, "It's always a balancing act since I hate to lose money. Hence, my portfolio is quite conservative. I have accepted the fact that my return may only be in the 3% to 4% range, so my major focus is on controlling expenses. Eventually, these efforts will get me to a minimal total expense level. I'm hoping at that point that my investment returns will improve."
Risk-averse Povdds emphasized the importance of controlling living expenses to help achieve peace of mind during retirement: "I have enough in short-term investments, including savings bonds that can support a conservative lifestyle for a few years. My portfolio has several thousand dollars in tax-loss carryovers, which will probably never be recouped, so when I sell stocks or funds, I am receiving less than when I bought the stocks and funds--this situation makes future losses less appealing. This also makes annuities and longer-term bonds less desirable since when inflation recurs, owners will be receiving dollars that are worth less. I also try to enjoy less expensive but more fulfilling activities like reading and living in my local area, and recommend cultivating some way to be grateful for what you have even in the midst of a poor economy. This will make it less likely that you will want to overextend your retirement assets."
Similarly, Heyka encourages investors to get organized--not only with their investments but with day-to-day expenses: "I am nearing retirement in less than three years. During my 'accumulation phase' I had a spreadsheet that tracked my portfolio value, my contributions, and so on. I had sleepless nights two years ago with the dramatic volatility. My suggestion is to start a new tab in your spreadsheet dedicated to the cash flow of your portfolio. Build your portfolio out of companies with rock-solid balance sheets, stable and durable businesses, and with growing cash flows distributed to you, the owner. Then, when the market makes big moves in either direction, go back to this tab. Look at the cash flows. The values will come around if you can live with the cash flows. If you need more cash flow because your account is not big enough to support your lifestyle, cut the expenses. Think like a business. Sell off bad assets and reduce costs."
Mind the market, not your age.
While most of our retired users were notably more concerned about avoiding losses and preserving nest eggs, many of you also expressed that one's age should not discourage an investor from seeking to profit from the market.
For TOOOINTENSE, age has had little impact on his investment choices: "I prefer to let the market and the economy determine my asset allocations. Bonds did me well for the past 30 years, but I am convinced that their benefits are limited now. Equities require a more subtle touch and read, and have been (and will always be) a part of my portfolio. There are times to be defensive, and times to be aggressive, [but] my age will not determine my investment philosophy or allocations, any more than Warren Buffett's age determines his. I feel the key to success is to remain flexible and take advantage of the opportunities the market presents. I do like Buffet's two rules of investment: rule number one, don't lose money; rule number two is don't forget rule number one."
For connoc, a solid start and consistently profitable investing led to greater leeway in terms of investments during retirement. Short of taking some precautionary measures, connoc plans to keep an eye on growth opportunities: "As I approach retirement in less than two years, my thoughts are 'why would I want to change my asset allocation/tactical strategy if it has served me well?' The only difference I would make is to put two to three years' worth of expenses in more stable investments. [But] I invest to make money. That is part of the fun! If I were to focus on asset preservation, I might as well turn it over to a manager (for the usual 40/60 split). Many would say the 40/60 split pays well. But who wants to run with the herd?"
In that same vein, Bnorthrop is determined to keep a hold on current assets, but also to take advantage of what the market has to offer. "I'm three years away from retirement and have made some conservative shifts to my allocation but nothing earth-changing. I'm keeping about five years of living expenses in cash/cashlike/short-term [holdings], and the rest is invested largely the way I have always invested. I expect to replenish the cash in more bountiful years and let it ride in the lean ones. Hopefully this will not lose money and make enough."
LuckyDog echoes, "I am retired. By the third quarter of 2009, I had recouped most of what had been lost in months before. I then moved the investable money to fixed-income investments in my retirement plan. This money will not be needed for a long time, if ever. It is much more of a priority to try and make a little profit than is the concern of losing principal. When things turn around, maybe we'll take a little more risk."
User mws17 offered the following portfolio-management strategy for holding at least a slice of risky assets within a retirement portfolio that's largely geared toward loss aversion: "We keep two distinct portfolios. The first comprises 95% of our savings, and holds conservatively run mutual funds/exchange-traded funds. The second, comprising the remaining 5% of our savings, is a common stock portfolio where we take more risk in an effort to earn more. Will the risky portfolio always outpace the conservative portfolio is anyone's guess. Right, wrong, or somewhere in between, this philosophy is within our comfort zone and is working out well strictly for us."
