Should You Really Own Fewer Stocks in Retirement?

Have you ever heard those investing cliches that sound like real advice but aren’t? You know, like “sell in May and go away,” “the trend is your friend,” or the so-called “100 minus your age” rule, which says you can figure out how much you should own in stocks by simply subtracting your age from 100 (so if you’re 65, then 35% of your portfolio should be in stocks).

It’s all a bunch of garbage, but right now we want to focus on the suggestion that the older you are, the less exposure to equities you should have. Is that a true statement?

For someone who is approaching retirement, but not there yet, I would say it could be a very good idea to begin lowering your allocation to stocks. You could change the allocation in, say, your 401(k) to include a higher percentage of safer, non-volatile assets, thus lowering your exposure to stocks as you get closer to your retirement date. That way, if the market happens to have a bad sequence of returns early in retirement, you’re potentially more protected on the downside.

But it’s at this point where the “own fewer stocks” idea needs to change. Once you start distributing money from your portfolio, retirement research tells us that you actually may be better off with an increasing exposure to stocks—just the opposite of conventional wisdom.

You accomplish this is by spending down the non-volatile assets in your portfolio first, where you aim to use a reserve of cash and bonds, or bond equivalents, to cover your spending needs for the first 10, 12, or even 15 years. By spending down this portion of your portfolio and leaving the equities alone for that time, the percentage of equities you own goes up by default. We call this a Bucket Strategy—you can call it anything you want.

The point is that by slowly increasing your percentage of stocks at retirement, you may be able to take advantage of what the market gives you. Remember, outcomes for a 30-year retirement are driven heavily by the results you get over the first 15 years. So if those first 15 years are good, your equities will have grown, potentially giving you enough to get through the next 15 years. But if the first 15 years are bad, a rising exposure to equities is similar to systematically dollar cost averaging into the market, which may put you at a nice advantage for a potential recovery during the next 15 years.

The bottom line is this: at Lucia Capital Group, we believe in looking at both conventional and unconventional wisdom to help our clients navigate through the retirement maze. Give us a call! We’re here to help.

Information presented should not be considered specific tax, legal, or investment advice. You should always seek counsel of the appropriate advisor prior to making any investment decision. All investments are subject to risk including the loss of principal. This material was gathered from sources believed to be reliable, however, its accuracy cannot be guaranteed.

Different types of investments and/or investment strategies involve varying levels of risk, and there can be no assurance that any specific investment or investment strategy (including the investments purchased and/or investment strategies devised by LCG) will be either suitable or profitable for a client's or prospective client's portfolio, thus, investments may result in a loss of principal. Accordingly, no client or prospective client should assume that the material presented (or any component thereof) serves as the receipt of, or a substitute for, personalized advice from LCG or from any other investment professional.

It is important to keep in mind that investments in fixed income products are subject to liquidity (or market) risk, interest rate risk (bonds ordinarily decline in price when interest rates rise and rise in price when interest rates fall), financial (or credit) risk, inflation (or purchasing power) risk and special tax liabilities. Interest may be subject to the alternative minimum tax. Treasury securities are backed by full faith and credit of the U. S. Government but are subject to inflation risk.

A dollar cost averaging strategy does not guarantee a profit or protection from loss. Since such an investment plan involves continual investment in securities regardless of fluctuating price levels, you must consider your willingness to continue purchasing during periods of high or low price levels.

Raymond J. Lucia Jr. is chairman of Lucia Capital Group, a registered investment advisor and CEO of its affiliated broker-dealer, Lucia Securities, LLC, member FINRA/SIPC. Advisory services offered through Lucia Capital Group. Securities offered through Lucia Securities, LLC. Registration with the SEC does not imply a certain level of skill or training.

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