Think Stocks Don't Belong in Your Retirement Portfolio? Think Again


For decades it's been gospel that the ideal retirement portfolio is conservative. Forget growth -- go for safety. Forget stocks -- embrace bonds.

This approach does seem logical at face value. After all, most of us lose our appetite for risk as we age. Our ability to recover from losses is greatly diminished as we approach our post-work years. The specter of a cash-poor retirement is terrifying.

Yet there's new evidence that things aren't quite so black and white. Our accepted retirement dogma, in fact, might be in line for a revision.

Should stocks remain a significant part of your retirement portfolio?

Let's find out.

The pro-stock argument

Wade Pfau is a professor of retirement income at American College in Bryn Mawr, Pennsylvania.  Pfau recently authored a paper with Michael Kitces, a partner Pinnacle Advisory, a private wealth management firm. 

Pfau and Kitces argue that we shouldn't eschew stocks at all. Instead, we should chart what they call a "rising glide path." That's essentially a poetic way of saying we should move toward a higher percentage of stocks in our retirement portfolio.

Sounds crazy, right? Yet Pfau and Kitces come armed with evidence to support their assertion. The pair ran a multitude of computer simulations featuring a mix of stocks and bonds. The results were surprising. 

Using historical U.S. data, they determined the best chance of a prosperous retirement lies with stocks. In fact, they advise we should tiptoe up to the very edge of our risk tolerance to pursue this approach. Doing so, they say, gives us the best possible odds of flourishing.

Is there a catch?

There are, as always, caveats. Stocks are volatile. This means some years a pro-stock stance will pay off more than others. Also, while historical data tells us much, it can't predict the future.  Should the market not perform to historical averages, these projections lose utility.

There's also the inherent value of a conservative allocation to consider. Perhaps you'll lose money by tilting away from stocks. In fact, it's probably likely you will. Yet the value of security can't be lightly dismissed. If another financial crisis emerges, those with bond-heavy portfolios will surely be smiling to themselves.

Essentially it's a trade off. Are you willing to forego higher security for better returns? Are you confident you can buy the right stocks at the right time? It's important to remember that most of us aren't great stock pickers -- and that includes financial services professionals.

It's also wise to remember that not everyone can afford to be ultra-conservative. Recently the Center for Retirement Research at Boston College released a report that said half of Americans have almost no retirement savings. That's an astonishing -- and profoundly depressing -- fact.  It's also a good argument for a growth-based approach. After all, if you don't have enough anyway, why not give the market a chance to close that gap?

Should you move toward stocks?

Ultimately, conclusions can be drawn for large groups, but decisions must be made on the individual level. That means it's important to investigate your finances before making any change.  Some moves to consider:

  • Meeting with your financial adviser to discuss your allocation strategy.
  • Taking a rigorous inventory of your financial assets.
  • Projecting how much you'll need in retirement.
  • Projecting your rate of withdrawal in retirement.
  • Determining whether your current strategy is sufficient.
  • Determining if you can afford to become more aggressive.

Once you've explored your financial situation in greater detail, you can make an informed decision about your allocation. The available data seems to suggest an aggressive posture toward stocks is justified. Not everyone, however, is in position to shift dramatically toward stocks. If you have questions about your ability to absorb losses, a traditional approach may be best.

The takeaway:

The old retirement allocation rule was simple. Just subtract your age from 100 -- that's your stock allocation percentage.

These days things aren't so cut and dried. The recent research offered by Pfau and Kitces is one more piece of evidence that the "100 Rule" should be revised to "110 or 120 Rule" -- and even that may be conservative.

We're living longer, so our money needs to stretch with us.

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