Should I be investing more aggressively at this time?
I have a frozen 401(k) with $108K from a former employer that was consumed by a bigger entity. I now have a 403(b). I am 50 years old with the goal to retire at 68. I am currently in a moderately aggressive plan. Would it be wise to increase to a more aggressive plan given my age and the current state of the economy? I see the returns of late being better and wonder if even for a short time, it might be of benefit?
In my 17 years in the business, I have come across many investors who were "aggressive investors" until their first big drawdown, then they were "conservative investors." The caution is to know how much risk you are willing to take, then compare that to how much you actually have. If your account is all equity funds, then you may have as much as 50% risk. I say this because the major indexes have declined by that much or more twice in the past 17 years. While this doesn't mean it will happen a third time, we also should not be surprised if it does. This is where asset allocation becomes key to risk management. Without detailed knowledge of a person's situation, investment choices, time horizon and so on, it is difficult to render an informed opinion. Consider finding an investment professional willing to work on an hourly basis to help you work through these important aspects. Then, you will be able to make an informed and rational decision that is in your best interests.
You should become less aggressive, not more. Regardless of your age, U.S. equities as a group have rarely been more overvalued. We are likely to have a bear market in 2017-2019 which is similar to the ones in 2000-2002 and 2007-2009. You should go for the most guaranteed income with the least risk.
When deciding how to invest your savings, remember that your risk ability and risk willingness are the two primary components when selecting a proper asset allocation.
Risk ability is quantitative and relates to your capacity to achieve your financial goals based upon the evaluation of data – the size of your investment portfolio and the impact that increased volatility will have on your ability to achieve your goals, your time horizon (both pre and post retirement), anticipated short term liquidity needs, etc.
Risk willingness is qualitative and corresponds to your emotional level of comfort with market volatility through different market cycles – How would loosing 36% of your portfolio’s value in a 12 month period make you feel? What would you do if that happened? Both risk ability and willingness are important factors in determining your asset allocation.
As your portfolio drifts away from this strategic allocation due to market movements, you should then periodically rebalance by selling assets that have richened and buying assets that have cheapened.
Rebalancing is a far better method than engaging in Tactical Asset Allocation (“TAA”) decisions such as increasing the risk profile of a portfolio in response to positive market returns. TAA calls have a low probability of being correct. This is mainly due to the fact that in the short term: 1) There can be many catalysts for market direction and many are anything but rational and; 2) Valuations seem to only matter over the longer term.
TAA decisions tend to be emotional and often driven by the investor’s desire to simply do something in response to the market’s actions. Finally, entering into a TAA is the easy part. The hard part is knowing when to throw in the towel on a "loser" and almost equally as difficult is knowing when to monetize a "winner."
I would suggest determining what your optional risk profile is by thoroughly examining your long-term financial goals and allocating your portfolio accordingly.
One philosophy I try to instill with clients is to not “chase” returns. You have to be comfortable with the level of risk you are willing to take not just in the up markets but even more so in the down. You have to go home at night, lay your head down on your pillow and fall asleep. If you are not able to do that because you are worried about your investments, then you are taking on too much risk.
That being said, a good general rule of thumb for investors is to hold the same percentage of fixed income investments in their portfolio as their age. For example, a 28 year old would have approximately 72% equities and 28% fixed income in their portfolio. The reasoning is that the 28 year old has a longer investment time horizon. Conversely, a 79 year old investor's portfolio might contain 79% fixed income and only 21% equities due to the shorter time horizon.
Circumstances change through an investors lifecycle which can alter the plan for the portfolio numerous times. Regularly conducting portfolio reviews with your financial professional will help your financial goals stay on track.
Best of luck,
The stock market is currently at an all-time high, but it has continued to rise overall with much better returns than bonds (which could drop in value with additional interest rate increases). So, the possibility of a significant drop in the near future should not be a surprise. At the same time, waiting or selling can be a huge opportunity cost as we saw the rapid recovery of the 2008 crash. If you are willing to tolerate more risk and have some time to recover, you could select a more aggressive portfolio. However, you may want to diversity that risk with an appropriately balanced ETF portfolio that also has some bond funds to help cushion downside risk. This can also be done in a separate Individual account while you max any employer matching contributions.