Time to Take Stock of Your Portfolio Risk

You know I am a big believer that your long-term retirement investments should include a big chunk of stocks. Over time, stocks provide the best chance of gains that will be higher than the rate of inflation. 

I have not changed my mind one bit about the importance of owning stocks to meet your long-term goals. 

But I do want to check in, or rather, have you check in on whether you just might own too much stock right now. 

Over the past five years, the S&P 500 stock index has more than doubled. For the past 10 years, it has nearly quadrupled. If you have left your portfolios on autopilot, that could likely mean that you now own more stock than you intend to, or should. 

Let’s say that your long-term strategy is to have 65% invested in stocks and 35% in high quality short-term/intermediate-term bonds. If you left that initial 60/40 mix untouched over the past five years it would now likely be 78% invested in stocks and 22% in bonds. Simply because stocks have done so well. 

Fidelity recently looked at the portfolio allocation mix of participants in retirement plans it handles. It estimates that about 1 in 5 retirement savers owns more stock than would be recommended based on the saver’s expected retirement age. And the folks who were most likely to be overweight on stocks were Baby Boomers. That’s troubling, because as you near retirement you want to make sure you are taking the right amount of risk, and not too much (or too little). 

The great news is that it is so very easy to rebalance your portfolio to get it back to your target allocation. Money inside a 401(k), 403(b) or Individual Retirement Account (IRA) can be moved around without having to worry about any tax bill.  

Chances are the company that manages your workplace plan, or where you have your IRA, has a free online tool that will show you your current mix of stocks and bonds. If you indeed find you have too much in stocks, you can sell shares of your stock funds and ETFs and buy shares of bonds funds and ETFs.  

I want to be extra clear on what I think are the right bonds to own: I only want you to invest in high quality bonds. Yes, I know high yield bonds provide more income. But high yield bonds, also known as junk bonds, are almost as volatile as stocks when the stock market is falling. Those are not the bonds you own to reduce your portfolio’s overall risk, and to make bear markets easier to live through.  

And I do not want you touching long-term bonds (or bond funds.) They have a different type of risk: they will lose the most value when interest rates rise. And right now, with rates so low, that’s something we all need to plan around. Short-term or intermediate-term bonds are best right now. If you invest in a 401(k) and it offers a “core” bond fund, that is going to be just fine. Core bond funds own only high quality bonds, with an overall focus on intermediate-term issues. If you have the option of a short-term bond fund, that’s a solid option as well. 

I hope you will take a few minutes to check if your portfolio needs rebalancing. Now is an especially smart time to do this. None of us knows what is in store for stocks, but what we do know is that stock values are at record highs. They may well go higher. But we shouldn’t be surprised if there is a market decline either.