How Soon Before Retirement Should You Adjust Your Portfolio?
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On today's episode, ready for retirement or we want to discuss how soon before retiring you should begin to adjust your portfolio. Now this is one the most important things you can know about retirement planning because if you don't do this soon enough, or other words, if you do that too late, desire retirement date could be wiped out. Bt, even if just temporarily by a major market down turn.

On the other hand, if you begin to adjust your portfolio too soon, you could miss out on substantial growth in your portfolio, which will then impact your ability to max my retirement, come and live out your ideal retirement. This is why, to state the obvious, IT is crucial that you understand when you should begin making adjustments to your portfolio and to taking even bigger step back. What do I mean by adjustments to your portfolio? I mean, when should start to allocate the amount of growth investments to stable investment or growth investments to conservative investments typically thought of as your mix of stocks to bonds? So that's exactly we going to be discussing on today's episode.

This is another episode of ready for retirement, and your host, James can all. And i'm here to teach you to get the musical life with your money and now on't up. So here's .

really what this comes down to. Really what this comes down to isn't how soon should begin to just my portfolio is how do I protect myself against the stock market decline. Now that might seem obvious, but when you we stated this way, it's a little bit easier to quantify what that adjustment should look like.

And the reason for that is because with the stock market, we have nobody what's gona happen going forward. But we at least have several decades, one hundred years of experience to help us understand how the market works and what typical recovery time crimes look like. So if you're listening to this just to really paint the picture, if you're in your thirties, you're probably not too worried about decline for your long term investments.

And if you're four one k baLance goes for rough array, baLance goes down. You maybe don't like IT and you most certainly like IT, but you're not too worried about you are building to retire. now.

Contrast that to if you're six years old and let's say that all of your money is in the stock market and you are very word about the ability to retire sume. Your retirement is coming up in the not too distant future. So you can start to see how at one point, you shouldn't be at all concerned.

In fact, if you in your thirties, you shouldn't invite a market downturn because that means you get to continue buying great companies at a lower Price. But if you're in retirement or near in retirement, you can start to see how, of course, that's not gonna as appetising because that's money that you're going to need sooner rather than later to live on in retirement. So what we're going do is we can look at statistics just to give some perspective on how markets typically work.

And they are going take a look of practical way of working around this, a practical way that you can implement in your portfolio to help protect yourself against some market decline and retirement. So let's start with the fundamental. We invest in stocks because we're investing in real companies with real earnings.

You're not just sticking your money, something seen numbers go up and down on the screen and hoping for the best long term. What you are actually doing, literally doing, is your buying owner ship in a company. Now that company has earnings as profits has revenues and those are things use than participate in as a shareholder.

You don't just buy one stocks or one company. I you're purchasing hundreds or even thousands of companies because if you diversify well and if you own a lot of great companies, you can build a lot of wealth over time. In doing that, the downside stocks don't always go up.

Historically, the S M P five hundred, so measure of five hundred biggest companies, america, it's average about ten percent per year over time. Now to stay the office, if we know that every single year we are going to get exactly ten percent, we probably wouldn't own anything other than that. Sure, maybe some other asset classes actually a Better long to turn.

But if you could guarantee ten percent per year, most of you are going to be all over that. Who wouldn't want that? The downside, again, to say the obvious is stockers don't always go up.

If they only went up, we will own other things like bonds or cash or other conservative investments. We would only own stocks. But because stocks, on average, one at every four years have a down year, have a bear market, that's why we start to own other things.

So let's look at that frequency as a starting point. How frequently do stocks go down and how frequently do stocks go up? Well, we're looking at the S M P.

Five hundred, and we're looking at the frequency of possible returns over last nine years. It's really easy to get dad around this on a daily basis. About fifty three percent of the time the S M. P. Five hundred goes up, meaning tomorrow, summer tomorrows, a market trading day.

If you want to bet what the markets going to do tomorrow is basically of complete a slightly more likely to be up and down, but fifty three percent of time the market positive on a daily basis and forty seven per time native. So not much Better than you're taking your retirement on the coin flip. That's a bad deal.

So the stock market is a very risk in the shorter you're equally as likely to lose money on a devi basis as you are to gain money. Now what if we extend that? What if we don't look at daily returns, but we look at monthly returns, while on a monthly basis, sixty three percent of the time, the S.

M. P. Five hundred has been positive over the last ninety plus years, which means the remaining thirty seven percent of the time been negative. So almost two thirds, one third ratio at that point. What about annually on an annual basis, seventy three percent the time the S N P.

I has a positive outcome, 别的 twenty seven percent the time IT has a negative outcome。 Take earlier one out of every four years, market goes on account your basis. But as we begin to extend that even further over five year rolling time periods, eighty eight percent the time the S.

M P five hundred has a pause of outcome overall, ten year old in time periods, the S M P five hundred is possible, ninety four percent to the time in over twenty years. Roll time periods has never been an instance in last ninety plus years that the S M P five hundred has not had a positive outcome. And IT add onto that, not only is there not been a negative outcome over those twenty year ruling time periods, it's not like an equal negative, equal positive.

There has only been substantial positive gains over the time prayers. So as an investor, that's why we invest. We are trading short term uncertainty for a high degree of probability of success over the long term and not just a small degree of success born.

You take your money, you compounded at eight, nine, ten percent over five years, ten years, twenty years, you can really begin to build til well. Now those numbers were just looking at the S. M.

P. Five hundred, just big U. S. companies. If you diverse five further, you look at small companies in our national companies, emerging markets, real state, so on. And so far, the frequency of those returns should increases. So that is an important thing to note as a fundamental starting point.

And this may sound obvious, but this is just designed to quantify some of us to give some framework for some of us because here's what we want to do next in practice, we want to take this into account, but IT doesn't just stop there. It's not just looking at, okay, are you retired in ten years? Well, there's ninety four percent probability that your money is going to be increased in value over that ten year tancrede.

That's a good starting point. But really what we want to know isn't when are you're retiring. It's when where you need these funds and how much of that what you need.

For example, let's assume that you are fifty five years old today and you won to retire sixty five. You might look at these numbers and say, okay, we're still ten years out. There's still a high probable success of that ten years.

Ninety four percent for look at the S M P. Five hundred just based on historical numbers, probably even higher depending upon the mix of different stocks in your portfolio or stocks and bonds in your portfolio. So you might look at that.

And okay, ten years out seems okay, but i'm going to start gradually getting closer and closer to my desired stock to bond allocation. I tuned to actually retire. Well, let's also assume that you're retire at sixty five.

They have a pension of social security. New spouse is gonna continue working for the first five years of your retirement? And between those three income sources, social security, pension and spouse learnings, you actually need to attach your portfolio. Well, in that case, you're ten years away from your retirement, but you're actually fifteen years away from these funds in your portfolio. So that's a key distinction.

It's not just when a you're retiring and that can drive the decision of when should start making some strategic shifts from stocks to bonds or stocks to other assets is not just that IT is actually when do you begin to need these funds from your portfolio. So in this example, your retirement in ten years, but you need funds in fifteen years. Is that fifteen your mark that I would be more focused on when IT comes to?

What should this strategic shift, this strategic alignment look like for your specific portfolio? So that's one thing you look at is not just when you retire, but when you actually need find meere portfolio. Now often times those two things coincide with one another, but not always.

The second part of this isn't just when do you need funds in APP folio, but how much do you need a portfolio. So for example, let's assume that you were tired and you know that you're going to need exactly forty thousand laws per year from your portfolio to supplement your other income sources. So let's assume that with that, you want to make sure that you have ten years worth of cash and bonds in portfolio in case of stock market drops a lot.

I'm not saying that's my recommendation. Often times actually, I start with less than that. But just for sake of example, let's assume you say I want ten years worth of cash bonds of my portfolio, that's not subject to stock market ups and downs.

So if we go through ten year time period of really refer turns on the stock market, I still have other assets like can be one in that case. Well, that comes out to a total of four hundred thousand dollars. If you have a one million dollar olio go into retirement.

And you want ten years worth of living expenses in cash or bonds that the four hundred thousand dollars. So in this instance, you would end up with a portfolio that sixty percent stocks and forty percent bonds, sixty, forty portfolio. So keep that in mind.

In order to meet that objective, you need to sixty forty portfolio. If you started with a million dollars. Now let's assume they are not starting with million dollars. Let's assume that you're starting with four million dollars, but you still have that same need. You still have four hundred thousand or our need for cash, bonds, other stable assets, what in this instance that four hundred thousand dollars a state fixed, but the portfolio value is now four million dollars, so four hundred thousand.

And this example now only represents ten percent of your overall portfolio, which means you could be more like a ten in this example and still have the same protections the cash and bonds offer in both instances, because your need from your portfolio was the same. The ninety ten portfolio and the sixty sixty portfolio provide the same level of protections. The difference was in both the dollar amount in the percentage amount you had in our growth ring to assets.

So you can start to see the difference here. And by the way, this is just look at the financial side of things. Another layer that you need to add on to this, what we're going to talk about just a second, is your comfortable ly with this type of a portfolio allocation retirement. I have a lot of clients. They have ninety percent more of their portfolio in stocks and they retired. They are fully comfortable with IT, have a lot of other clients that would never be comfortable with that type for allocation even if they knew they were secure enough with their overall portfolio to whether the the downturn in that example, just the up and downs in retirement would not be something that they could sleep with that night, at least not peacefully. So there's the what does your portfolio need side of this, we call this.

What's your risk capacity in terms of how much could you possibly have in stocks? And then there's more of the emotional side of the psychological side of even if you could afford to have more n stocks, doesn't necessarily mean that the best portfolio for you, if that's going to cause a lot of discomfort, that's going to cause a lot of anxiety in in retirement due to the up and downs of the market is going to create. So more on that in one second, but actually wants to go back to my example that I just used.

We just use an example to show how if your needs from your portfolio are the same. In both instances, a million doll portfolio is a four mortar lio. You would have different stock to bond ratio in those to accomplish the same goal.

Let's actually go back to that four million or portfolio example. And by the way, whether your port folios four million, four hundred thousand, forty million, the principles here or what I want you to focus on, don't focus too much on the dollar values. I'm just using this as an example. X on the principles.

And the principle there is, if you actually look at that four million or portfolio, and we know that our goals to generate forty thousand dollars per year and we want ten years of living expenses in cash, on bonds in case the stock market drops, well, here's another thing that I want you to consider, a four million or portfolio. And this, of course, depends upon how you are invested. But let assume that portfolio was generating in two percent dividend yelled that former long portfolio was generating eighty thousand dollars of cash divides.

Now why do we have cash on bonds? Go back to the very beginning when I say we don't own those because are going to grow a whole lot. What the stock market does we on those because they provide instability, they provide another asset and other resource.

Think of that is like the emergency fun for your portfolio that win the stock market is you don't want to sell your great investments. You can simply pull from your emergency funder. You can simply pull from your cash bonds, giving time for stock to recover with you a formal law portfolio didn't reading a two percent divided yield at eighty thousand dollars of cash come at that portfolio s creating for you.

You only need forty thousand. You are already creating two hundred percent of your desired income needs on, in your basis, just some cash dividend from me, a portfolio. Now you may say, well, James, sure.

But what happens in the stock market drops, what happens in the stock market drops thirty percent, forty percent, fifty percent. That can will happen. However, when he does, history actually shows us that dividends remain pretty resilient.

You look at two thousand, two thousand, two, for example, the stock market lost about half of its value. The U. S.

Stock market, that is, dividends only dropped by about one to two percent, meaning the company that was paying one dollar pressure in dividends at the death period was paying closer to ninety eight and ninety nine cents per share and divided. So that's incredibly resilient. In twenty twenty two, when the stock market dropped twenty five plus percent at its peak, dividends that you're actually increased.

So when you're looking at this, keep in mind dividends, the cash dividends companies pay, they do not rise and fall with the companies of stock value. The stock value is very spread. Tic IT can be up and down.

I can swiming wildly. Traditionally, dividends do not move as actively. They are main pretty steady. Now the flip side of this is two thousand later, two thousand nine, when dividends did actually go down by that quarter, but still dividends didn't get wiped out, dividends didn't drop as much as the stock market did. So keep that in mind near design the portfolio that you can look at, the cash dividends coming either from the stock portion portfolio or the interest income from the board portion, your portfolio, and that can help you to determine what allocation to use as well.

So that's the first part of the decision as you're asked to yourself, how soon before retiring do I start to transition from a majority or even all stock portfolio to the appropriate retirement portfolio, which in many cases is still majority stocks, but its maybe not all stocks or maybe not quite as many stocks as you had in your working years as you do in retirement. Not a universal thing, but just on average, that tends to be the case. What's the second part of the streamer with the second part to tag longer?

What I was talking about is there are reasons for using boss or are reasons for using cash. There is a financial reason and there a psychological reason. So that financial reason is not because we're onna grow a heck of a lot over.

We already establish that stocks traditionally are going to grow a lot more than bonds are over time. However, bonds provide something that stocks don't, which is stability in the short term. Even with bonds, you need to be very careful because in your like twenty two, if you just own an aggregate bond index, that aggregate bond index was down double digits.

So if you're sing well, what the heck my safety money is lost ten twelve percent will realize that not all bonds are created equal, have government bonds and corporate bonds, have short term bonds and long term bonds. You have junk bonds of high quality and all these different kinds of bonds. And unlike stocks where you might say, hey, for my stock market portfolio, I just want to be broadly diversified.

I want to own the entire U. S. Stock market. That could be a great strategy for a lot of people. However, if their bond strategy is I just want on the entirety of the bond market, which by the way, is enormous. But if you are just wanted to, only the entirely the bond market, probably a orbar strategy for most people.

What you really want to do, you want to use bonds for specific purpose where there's liability machine OK need to have a certain man and bonds that mature of the right time for me to be able to spend that money in my portfolio. Or where's reliability machine, which means I need to have a certain number bonds, certain mountain bonds in a specific donation or specific maturity, so those can mature. I can spend that money by pulling that money on my portfolio or it's to have something that's non corded the stock market as much as possible or for some other reason, maybe that's income, maybe that's something else.

But you need the first to find what is the purpose for the bond and the what special taps a bunch of years, but understand that the goal of bonds, whatever that purposes, should not be growth. Growth should be coming from the stockport of your portfolio or other asset portion of your portfolio, not from bonds. The finance for reason that I like to think of when IT comes to bonds is to protect against those downturns is to be the emergency fund.

So you need to have a stable amount and conservative investments of options of where to take income from when the stock market is down. So if you have a year where the stock market is down in the bond market is up, well, you can strategically say i'm not going to touch my stock market investments. Those are great investments.

They will recover. But I may be several months, even years. In the meantime, i'm going take money from my bond portfolio or right? So maybe the bond market is down in the stock market is that you're going to take money from the stock portion in your portfolio and not touch the bond portion or maybe they are both up.

The thing though is you want to have options, you want to have non correlated assets, you want to have things ago up and down on different frequencies. So have optionality and flexibility when IT comes to where you should draw your income from retirement. So that's the financial is on the second reason, the psychological reason comes under your person or resellers.

You may be in a position where you don't need to have any money in the bond market. Let's use an extreme example. You have an incredible pension and social security that cover all of your needs.

If you look at your portfolio and retirement, you technically don't need IT to create income because you don't need IT. You could have four to be a hundred percent stocks because if there is thirty, forty, fifty percent downturn, you could just not touch IT have time for at stock market to recover. You have the same investment horizon as someone does in their twenties authorities, which is a very long time now.

Just because you could afford to do that doesn't mean that's gonna sit well with you, doesn't mean that's not gonna cause your stomach to tie up and not when there's a market downturn. So that's what's important to know yourself. That's what it's important to understand.

How have you felt in previous downturns? I don't want to go too far on the spectrum because just because you feel a certain way, you could take that too far. You could be overly conserved because that helps you feel Better. But then it's horrible for your long term returns and it's horrible for your ability to maintain a comfortable so has to be this baLance between almost logically, mathematically, what's the best allocation and emotionally or psychologically, how do you feel about this? There needs to be a consideration from both sides, and then you need to be able to understand what's the right allocation for you.

But going back to my previous point, if stock market volatilities keeping you up at night and all, I mean, by volatility is both the ups and the downs of that craziness and uncertainty of short returns keeps you up at night, well, then maybe you should have more bonds in your portfolio. Even if they don't feel a financial need, they can still fill a psychological need. They can still help you feel Better porfolio. If that's gonna you stay invest. I will say this if you are going to add more to cash or bonds or stable investments like that purely for psychological reasons, there is nothing wrong with that.

However, before you do so, IT is wise to understand what are the long term applications that in terms of how much you might be able to spend later on in life, in terms of how much you might have left over as a buffer to pay for things like long term carney or things like that, how much might you have left over for your inherited tance, for legacy that you want to leave to children, to family, to charity? Some those things might not be important to you. That's perfectly fine.

All i'm saying to understand the trade of the decisions of me today because when you retire, IT may feel like you're the finish line and may feel like, okay, i'm here now I just into protect you might still have dirty plus years head of you in the difference between, say, an all stock allocation and all bond allocation to the extremes. If you compound that over thirty plus years, the differences are in. So make sure you understand the trades because more than likely you're not all one or all the other.

You're probably somewhere between. But make sure you understand what that's going to do to the long term projections of your portfolio to make sure you're comfortable with that. Because what you'd hate to see is say, okay, you know, I don't actually feel comfortable with the up and downs so you get way then you wake up one day and realized, oh, my gdss, I don't have nearly as much as I thought I would to continue paying the bills or to leave a legacy for my family.

And all the sudden, that discomfort, that psychological pain, is far worse than the psychological pain you would have face. Going to do some the update. Ts, there is no perfect solution here, but make sure you've considered everything before determining what the right allocation is for you.

So let's start to wrap this up and just to mize. We have talked about we have talked about the frequency of positive returns in the stock market, and we use the point to frame win. Might we need to have something that's not in the stock market as we closer to retirement, we talked about the fact is not actually retirement date that you're looking at.

Is the date the year going to start pulling money from your portfolio that's going to determine when you should start making changes. We then talk about the difference for the financial reason for assets like cash or bonds, your portfolio versus the emotional or psychological reason for that to tie all together. Here's what I typically have done with clients, typically about ten years out from retirement.

And by retirement, why I should be saying is the time that i'll start taking money from their portfolio. That's where I introduce the conversation of, you know what i'm not saying, we need to start making changes today, but let's at least begin the conversation. Why do I start the conversation ten years out even if i'm not going to make changes? I started IT because something might be saying they're going to retire sixty seven in their fifty seven today, but that sixty seven might not be a definite goal.

And we might look at their projections and say, oh, I thought I was sixty because i'm doing so well. I'd actually love to retire sixty two well because we start that conversation ten years out, we were able to keep talking about IT and they said, you know, actually wants to really accelerate my retirement. We weren't caught off guard.

We could say, OK. Now let's really start to accelerate in this transition from stocks to bonds depending on what their allocation ultimately was going to be because we brought IT. So I start the conversation ten years out more or less, but uses more like five years, they actually begin making some more substantial changes.

And substantial changes is a relative term because this is an example. If you're going from a portfolio, it's a hundred percent stocks to euro percent bonds and their retirement portfolio, just to use an arbitrary example, is going to be ninety percent stocks in ten percent bonds. It's not really radical changes that need to be made.

So a little bit here and a little bit there over the course the next five years, that's going to get them in perfect position to retire. Now if they are going from one hundred percent stock portfolio to a fifty percent stock portfolio, there are going to be more substantial changes along the way. But typically about five years out from retirement from the day that they are going to start point in funds that when I start making some actual changes to recommend some actual changes, to say, let's start getting you from where you are to where you need to be.

So to use another example, instead of going from one hundred percent stock portfolio today, then you retire tomorrow and immediately shift to a sixty, forty portfolio if that is the right allocation for you. But that's probably not the best thing to deal. IT works out great if the stock market is going higher and higher, R N higher, and then you happen retiring in the stock Marks at peak because you maxie the upward capture of performance and you immediate switch to what was best for you.

But if you wanted to do that, and you're like twenty twenty two, for example, in the stock market lost twenty thirty percent its value. Now all the sudden, because you weren't getting conservative along the way, because you arent making shift along the way, doesn't mean you can't retire. But IT may be pushed your retirement date back by twelve months, eighteen months, twenty four months, depending on what type of allocation that you had.

So that's typically what i'll do ten years out to start having a conversation, start looking at different things are really narrowing in is this actually retirement date? And how much will we need me portfolio at that time? Five years out, that's typically we were starting to make some strategic shifts. Those strategic chefs don't need to be cells and purchases. You could simply say, okay, workers are taking dividends and interest from our portfolio and reinvest that into the more conservative parts of our portfolio were gradually getting to where we need to be.

On the flip side, you could say, okay, all new four one k contributions or our new investments are going to start going to more the conservative investments as we build our way to where we wanna go? Or do you simply could say, you know that if today or one hundred percent stocks and we know that we want to be, for example, eighty percent stocks, twenty percent bonds in five years, well, every year do you make a four percent allocation shift to your portfolio? So to the first year, you go ninety six percent stocks, four percent bonds than ninety two percent, eight percent than eighty eight percent, twelve percent.

And what you are doing is you started take chips off the table little by little. So by how do you actually need funds from your portfolio? You're in the right allocation for you.

All that being said, there is no perfect scientific way to do this. The stock market is a big uncertainty. What we're trying to do with this approach is to minimize the probability of unfavorable outcomes. We're trying minimize the risks minimized regret in the way you approach this. This is one framework and hope that framework helps.

But this is the way that I think makes a lot of sense when we're trying to look at things from the standpoint of what is the role stocks verse, what is the role of bonds and how do we think of both, both from our ancient standpoint as well a psychological standpoint to come up with the right allocation for us and to begin that shift in the most appropriate time frame. So I hope that helps. Thank you, everyone, for listening.

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