If you’re a certain age, or getting close to it, you might hear something like this: “Now that you’re older, you need to invest more conservatively.” But what exactly does this mean?
For starters, it’s useful to understand that your investment preferences and needs will indeed change over time.
When you’re first starting out in your career, and even for a long time afterward, you can afford to invest somewhat aggressively, in stocks and stock-based investments; because you have time to overcome the inevitable short-term market drops.
At this stage of your life, your primary concern is growth – you want your portfolio to grow enough to provide you with the resources you’ll need to meet your long-term goals, such as a comfortable retirement.
But when you finally do retire, and perhaps for a few years before that, your investment focus likely will have shifted from accumulation to preservation. And this certainly makes some sense.
Even though you may spend two, or even three, decades in retirement, you actually have many shorter time frames for withdrawing money – that is, selling investments – from your retirement accounts, such as your 401(k) and IRA. In fact, you may be taking withdrawals every month – and you don’t want to be forced to sell investments when their price is down.
Consequently, you’ll want a portfolio that’s less susceptible to market downturns. This means that you may need to reduce the percentage of stocks in your investment mix and increase your holdings in investments that have less growth potential but offer greater stability of principal, such as bonds.
If you follow this formula, you will have become a more conservative investor. But this evolution – from aggressive to conservative – isn’t that simple, or at least it shouldn’t be.
If, as mentioned above, you are retired for two or three decades, you will have to deal with inflation. And even at a relatively mild 3 percent annual inflation rate, your purchasing power will decline by about half in just 25 years. This is a real threat to retirees, who, unlike active employees, can’t count on increases in earned income to overcome increasing costs of living.
Given this reality, you will have to find your sources of rising income in your investment portfolio. One possibility: Dividend-paying stocks, some of which have increased their dividends for many years in a row.
Still, like all stocks, these dividend payers can lose value from year to year, and they can also reduce, or even eliminate, dividends at any time. In other words, they aren’t risk-free – which brings us back to the question of how “conservative” of an investor you can really afford to be when you’re retired.
In the final analysis, there’s no simple answer. On one hand, you probably shouldn’t be as aggressive an investor as you were when you were much younger and still working.
On the other hand, if you were to primarily own certificates of deposit and U.S. Treasury securities, you might face the prospect of outliving your money. Ultimately, you’ll need to maintain a balanced portfolio that helps you control risk today while providing you with growth opportunities for tomorrow.