Financial Planning

Cut Your Investing Risk at Every Age

Take action now to preserve your gains.

Nobody likes to pay for insurance. But we do it to protect ourselves from unforeseen disaster. Likewise, reducing risk in your portfolio after a long bull market in stocks can ensure you’ll keep more of the gains you’ve racked up, while giving you more confidence to stay calm when the next bear market arrives. Here’s a look at financial de-risking strategies for three age cohorts:

Twenties, thirties, early forties

You have little reason to cut investment risk by selling stocks. You have decades until retirement, which means decades to recover from temporary market losses. The exception might be younger people who expect to tap their nest egg for a major outlay, such as a house. Whatever your goal, the only safe place for money needed in a few years is a cash account.

Young investors may have better ways to cut risk than by trimming stocks. Reducing debt is one; reining in spending to boost savings is another. And for forty-somethings, hiring a fee-only adviser to do a full review of your finances might be an insurance policy well worth the cost.

Late forties, fifties, early sixties

These should be your peak earning years and also your peak investing years. But the more assets you accumulate, the more fearful you may become about losing a large chunk of what you’ve saved if markets slump. Depending on your risk tolerance, that may call for a gradual reduction of high-risk assets, such as stocks.

Laura Tarbox, a certified financial planner who heads up Tarbox Family Office, models most clients’ portfolios on one of four basic asset mixes. Foreign and U.S. stocks account for more than 80% of assets in her aggressive-growth portfolio, then dwindle to 64%, 48% and finally, to 30% of assets in the most conservative mix. The rest of the assets are in bonds, cash and alternative investments. For a client who feels the need to be more defensive, “we might dial the whole portfolio down” to the next rung, she says.

Setting stop-loss sell orders on stocks in your brokerage account can limit losses in a market downturn. Such orders trigger a sale once a stock falls to a price that you preset. Or consider put options, which grant the owner the right to sell a stock or an exchange-traded fund at a preset price to another investor, up until the option expires.

Advisers say couples in this age group should make sure they’re on the same page when it comes to investment risk-taking. CFP Robert Wander, of Wander Financial Services, says it’s natural that “one spouse will have a different risk tolerance than the other.” But both should agree on financial goals and the plan to reach them.

Early sixties and older

If you are in this age group, capital preservation and income generation (from bond interest or stock dividends) become increasingly paramount because retirement is in view and you’ll eventually need to make regular withdrawals of assets to pay living costs. You’ll need to consider how much income you’ll have from Social Security and pensions, how much you can reasonably withdraw from investments each year, and the most tax-savvy sequence of withdrawals from retirement accounts versus taxable accounts.

Given the potential to live beyond 90, you’ll still need some growth stocks to provide long-term appreciation. But for retirees, it’s also important to build up a year or two of living expenses in cash accounts (see Make Your Money Last Through Retirement). The idea is to avoid having to sell stocks at a low if a bear market hits, depleting more of your nest egg than you otherwise would and leaving less to grow over time. With the cash cushion, you can ride out a bear market until stocks begin to recover. Considering how strong the stock market has been, if you’re already expecting to trim stocks in 2019 to fund living expenses, “consider peeling some off now,” says Christine Benz, personal finance director at Morningstar. “By doing so, you’re reducing portfolio risk, raising needed cash and rebalancing to a better comfort level."

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