Page 9 - Kiplinger's Personal Finance - November 2018

INVESTING

all-or-nothing bets. Even with Stan- vestments for income for 30 or 40 your finances. The other is how it
dard & Poor’s 500-stock index up years, you can afford to ride out what- would affect you psychologically.
329% from its 2009 low, not including ever rough periods inevitably lie ahead Your risk capacity—the ability to ab-
dividends, there are plenty of good for stocks. “For people in their prime sorb losses without significant harm
reasons to stay bullish on stocks: The earning years, the day-to-day in mar- to your lifestyle—could be high, de-
global economy is expanding, U.S. kets doesn’t matter,” says certified pending on your age and the size of
consumer confidence is high, and financial planner Robert Wander, of your nest egg. If your risk tolerance is
robust corporate profits underpin Wander Financial Services. “We tell low, even modest market losses could
share prices. And even if you managed clients the only thing that matters is cause you to panic and make disastrous
to call the market top, you’d also have saving as much as you can.” moves, such as selling everything.
to call the bottom to get back in. “You It’s a different story for people in
have two decisions to get right,” says their fifties and older. The day when RETUNE YOUR PORTFOLIO
Liz Ann Sonders, chief investment you’ll need to draw down your nest Reconciling risk capacity and risk tol-
strategist at Charles Schwab. “That’s egg to live on is coming into focus, erance is how you get to the most im-
a really, really difficult thing to do.” though it may still be years away. You portant investing decision: your asset
(Prices and other data in this story may not be able to risk a substantial allocation, or how you divide your
are as of September 14.) drop in your portfolio’s value because portfolio among stocks, bonds, cash
The logical strategy now is to fine- you have less time to wait for it to re- savings and other investments. Stocks,
tune your portfolio: Make sure your cover, compared with younger inves- of course, are among the riskiest and
investment mix matches your toler- tors. Say you’d bought the S&P 500 at most volatile financial assets. But that
ance for risk and that it will meet your its peak in 2007. You would have been also means they often offer the great-
objectives over the next few years, in the hole for more than five years. est potential returns in the long run.
such as providing needed income if From 1929 through 2009, the S&P Interest-paying, high-quality bonds
you’re retired. If your portfolio has 500 experienced 13 bear markets, de- have much less risk of drastic short-
been on autopilot for the past 10 years, fined as declines of 20% or more. The term losses than stocks; the trade-off
it may simply be out of whack with average loss was just a tick less than is that they offer much lower potential
your needs—especially if they’ve 40%—but the drops ranged from 20% returns. Cash savings, such as bank
changed. Imagine if all of your cloth- to 86% (see the chart on page 56). “You accounts, have little or no risk, but
ing were a decade old. How much need to ask, What would a big market they offer even lower returns.
would still fit you? Here’s what you decline do to me?” says Christine Benz, Classic asset allocation rules call
need to think about now. personal finance director at Morning- for young people to keep 80% to 100%
star. There are two aspects to that of their nest egg in stocks. As you age,
YOUR TIME HORIZON question. The first is how a plunge the percentage in stocks should de-
Investors in their twenties, in your portfolio’s crease, and bond and cash percentages
thirties and even forties value would should rise. At age 60, a typical alloca-
have time on their side. affect tion might be 45% stocks, 45% bonds
If you’re fairly cer- and 10% cash. But your individual mix
tain you won’t should depend on your goals and your
need to tap ability and willingness to handle
your in- risk. If you chose a particular mix
years ago, it’s important that you
review your portfolio now to see
whether the allocations have
shifted markedly. Given the
stock market’s nine-year
climb, “an investor who had
a stock-to-bond target mix of
65%-35% years ago could now
be 80%-20%,” says Wander. That
means the portfolio is at much
greater risk of loss when stocks
eventually stumble.
Fidelity Investments looked
at the biggest 12-month losses

50 KIPLINGER’S PERSONAL FINANCE 11/2018

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