Studies suggest that maintaining a significant exposure to stocks may be essential to a retirement investor's long-term success.
A venerable bit of investment wisdom counsels investors to keep a portfolio allocation in bonds equal to their age — 65% at age 65, for example. This seems to be backed by common sense: as you age, you may come to rely more and more on your nest egg to provide income, and you therefore cannot afford to put those assets at risk. And stocks, while offering the potential for higher long-term returns, may be much more volatile than bonds in the short run.
In reality, a substantial body of research suggests that adopting a too-conservative approach toward retirement investing may jeopardize the very income streams investors are trying to protect. The potential consequence of limiting or eliminating equity exposure is one every retirement investor fears: outliving his or her assets.
Aggressiveness: The Conservative Approach?
Of course, no simulation will provide an accurate picture of things to come, and there is no guarantee that the market's future will look statistically similar to its past. But it is worth reflecting on the common-sense basis of these findings. As life expectancies continue to rise, retirements are getting longer. These extra years, a blessing to the retiree, are an additional burden for a retirement portfolio.
Equities, shunned by some retirees because of their higher risk, may also deliver higher potential returns over the long run and may thus help shoulder this burden. Contradictory as it may seem, the research suggests that retirement investors may want to consider a significant level of stock exposure to avoid draining their savings.
It's best to talk with your financial advisor about your individual situation. If you don't already have one, call us at 1-800-896-2645 for assistance.