A recent study indicates that only 10% of investors aged 65 and older are willing to assume above-average or substantial investment risk, compared with 19% of investors aged 50 to 64 and 26% of those aged 35 to 49.1
One of the most basic investing principles is that assets with greater growth potential generally carry greater risk. An investor who is two or three decades away from retirement could decide to be more aggressive in pursuing growth because there may be more time to recover from any potential losses.
As retirement approaches, conserving principal typically becomes more important — and even more so after retirement. Many investors address this concern by transitioning to a more conservative asset allocation (see chart). Asset allocation is a method to help manage investment risk; it does not guarantee against investment loss.
Continuing Need for Growth
Even though the strategy described above is a good rule of thumb, you cannot afford to become complacent with your investments during retirement. Without some growth in your portfolio, withdrawals from your savings could quickly reduce your principal, and inflation could erode your spending power. The challenge is to find an appropriate balance between the need for growth and the desire for principal preservation. Here are some factors to consider.
You may have more time than you think.Your savings may have to last longer than you originally anticipated (possibly for 20 to 30 years of retirement), but you may also have more opportunity for your investments to pursue growth.
Consider your other income. Social Security was never intended to be a primary source of retirement income. Income from other sources — such as rental property, a business, or an inheritance — might give you more flexibility in your investment strategy.
Your goals could require a different approach. Assess your retirement goals and the cost to pursue them. You shouldn’t assume risk just because you have expensive goals. But a clear picture of what you want to achieve in retirement might help you develop a more appropriate strategy.
Be comfortable with your investments. Consider your risk tolerance. If you choose a more aggressive approach, be prepared for more volatility in your portfolio and a greater chance of loss. Conversely, if you don’t feel comfortable with market ups and downs, remember that a conservative portfolio may have lower growth potential.
Regardless of your approach, there’s no guarantee that your investments will perform as expected. All investments are subject to market fluctuation, risk, and loss of principal. When sold, investments may be worth more or less than their original cost.
There is no simple answer to finding the appropriate balance between stability and growth, but it’s an issue you should address regularly before and during retirement. We can examine your approach and suggest ways to help your portfolio work smarter for you.