Portfolio Risk And The Near Retiree
Identifying and sticking to a manageable degree of portfolio risk can be problematic
for the near-retiree with inadequate retirement funds, especially as he or she may be tempted to invest heavily in high-risk income sources for bigger yields or tend towards very conservative investments to safeguard what little money he or she has. When it comes to stocks, which are an essential growth-oriented investment necessary to any well-balanced portfolio, it is all about finding the right balance.If you only have a small part of your overall portfolio invested in stocks (possibly because you avoided equities in the crisis two years ago), you can increase expected returns and accumulate a bigger nest egg by buying into more stocks. Some advisors say that this move will also possibly increase the amounts of money you can withdraw per year when you retire.
Moderation is the key here. Make sure that you do not invest too much of your money in stocks that you will lose a lot in a future market drop. Theoretically, getting involved in more investment risk may be sensible; although financial planners find that many investors do this and simultaneously think that they can take on more risk because of necessity. If you already have much stock, adding to these can be a disadvantage, at least the returns may fluctuate and become unpredictable, and effectively reduce the sustainable annual amount you can withdraw in retirement.
For an investor who is nearing retirement, investing heavily in individual securities can actually be an obstacle to accumulating enough funds due to the risk involved (these securities include shares in the company that employs you). Statistics show that around a fourth of all 401K participants aged above 59 have upwards of a fifth of their account balances invested in company stock. They confuse familiarity with safety, as many of these individual stocks come with twice or thrice the risk of an equity portfolio that is diversified better.
A good number of financial firms calculate possible investment outcomes by examining market performance patterns. This method of analysis has caused many financial and investment advisors to recommend that workers who only have three years to five years before retirement should not go beyond 60% of their portfolios in stock, but ideally at forty percent. Twenty percent of a portfolio in stock can lower your portfolio risk and be viable, if a near-retiree works with a sustainable annual withdrawal rate of 3.8%, not four percent.
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