Question: My wife and I have our retirement savings with a brokerage, and we have a 99% probability of success of achieving our goals. We are both 66 and currently healthy. Our portfolio allocation is 6% cash and 94% equities. I am cautiously wading into 2024 watching inflation, market risk, interest rates, housing market, and the possibility of recession. I feel at some point we should convert our portfolio to more secure investments, such as treasuries. Our financial advisor always leaves it to me, but feels we should stay in the market for now. What’s the right thing to do? What questions should I be asking about why this is his recommendation?
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Answer: Although your probability of success is high, it seems like you have some concerns about the level of risk you’re taking. So it might be time to consider some different scenarios. “Ask your adviser how much risk you can take off the table while still meeting goals and not jeopardizing your financial stability. Decisions you do or do not make now will impact your future, for better or worse, depending on how you look at it,” says certified financial planner Ben Galloway at Greenspring Advisors.
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Specifically, ask your adviser “to run some scenarios with a portfolio that combines stocks and bonds to see what impact it has on the probability of success of having the retirement you want. And generally, everything that is above 70% is considered an excellent percentage,” says certified financial planner Alonso Rodriguez Segarra. “In particular, you might ask the adviser to show you what would happen to that 99% result of this portfolio with a high composition in stocks if it suffered two years of significant falls like those of 2008 and 2009, or during Covid, versus a portfolio with stocks and bonds,” says Segarra.
While you “should feel great,” about that 99% probability, that doesn’t mean your equities allocation is right for you, says certified financial planner Steven Sivak at Innovate Financial. “The main question I have is how much risk could you take off the table without jeopardizing your probabilities? If you can cut your equities to 70% and that lowers your probability of success to 95%, which is a guess, that’s a trade you should definitely make. A good adviser should already be having this conversation about how to safely de-risk your portfolio and it has nothing to do with watching inflation, market risk, interest rates, housing market or recession, those are risks that are present at literally all times,” says Sivak.
Furthermore, “you may want to ask yourself if you’d be comfortable with a 25% drawdown or more during the next recession? If your answer is no, then you need to understand why your adviser is resistant to a moderation strategy for your account. Do they not get compensated the same when you add fixed income to the equity allocation? My recommendation would be to go with your gut feeling and moderate while the market is at all-time highs,” says certified financial planner James Daniel at The Advisory Firm.
It might be helpful to start with the end in mind. “A holistic solution is needed and that requires a deep discovery and client relationship. Piecemeal solutions without the definition of the ideal end will not achieve your goals or bring peace of mind,” says Elliot Dole, certified financial planner at Buckingham Group.
Remember that your adviser is there to help you manage your blind spots. “It’s the bus you don’t see that hits you. While you’re healthy now, what if you have a long-term care event and the market drops? You could easily be retired for 30 years, which calls for long-term investment thinking,” says certified financial planner Pamela Horack at Pathfinder Planning. If your situation has you thinking you should start to reduce your portfolio risk, Horack says, “Have your adviser run numbers and see what your probability of success would be with a lower equity percentage. Consider reducing the equity percentage over time, but not all at once.”
Basically, you want to think about how you wade into a new investment strategy. “You do it slowly and consistently until you reach a place you feel comfortable. Introducing fixed income or more conservative investment strategies into your portfolio should be similar. Changing your entire investment strategy does not need to happen instantly or else it could shock the system,” says Galloway.
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Questions edited for brevity and clarity.