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?
It it not really practical or prudent for an adviser to give you an answer to your question in the way posed. You should always be careful of having an investment strategy built on "returns of late." People who approach investing this way tend to be out of step with the markets. They get in at the wrong time and out at the wrong time. Your 401k/403b strategy needs to be based on your tolerance for risk, age, goals, understanding of what can happen, etc... That being said, you can look at your money two ways. There is the money you've already accumulated, and the money you've yet to invest. I certainly don't see anything unwise about directing your future contributions to an aggressive strategy, as that is all new money and can withstand some volatility. However, be very careful about making any changes to your current accumulated balance.
On the surface, an aggressive plan might seem like a good idea. But in fact, it’s a trap I’ve seen many investors fall into.
From my perspective, there are three problems with this approach.
The first is that markets are notoriously unpredictable.
In fact, they almost always do what we least expect. A good example is the recent Trump election and surprising stock market rally. Who expected that? While it is true that the markets have been doing well, we cannot be sure how long this trend will continue. But what we do know with absolute certainty is that if you increase the risk in your portfolio, you will experience more volatility. You will also experience greater declines when the next downturn comes. And it will come. But investors who are inclined to take more risk when times are good often believe they can avoid market declines. They believe they can ratchet the risk back down before things get too bad. Although this is a compelling idea, it is far more difficult to accomplish than you might expect. Most investors who travel this path wind up doing more damage than good.
The second problem we encounter is that markets are far more volatile than most people realize.
In fact, on average the S&P 500 is down 14% at some point every year. I know it sounds impossible but it is true. If the market is down that much at some point every year, it’s not reasonable to expect that you can increase your risk while the markets are doing well and get more conservative before things go down. Don’t get me wrong, some people will attempt this and they will succeed on occasion. But in my experience, this is no better than gambling and will inevitably yield the same unpleasant results.
The third problem in tying your investment allocation to market conditions is that market conditions are always changing.
If your philosophy is to be more aggressive when the market is doing well, what do you do when you are surprised by a significant market decline? Do you hold? Even if the market continues to decline? If so, for how long?
As you can see, trying to play catch up with your investment portfolio is likely to do you more harm than good.
Quite the contrary. The U.S. markets have done well ecently, but the net result of that is that stocks are richly valued. That's not to say they cannot climb further. Even so, it's important to keep in mind the fact that in six of every 10 years, the market has a correction of 10% or so during the year. And the warmer months are usually not-so-hot for the markets. So I wouldn't be in a rush to take on more risk.
Assuming you have good health, you have a time horizon of several decades and would be well advised to keep the majority of your holdings in equities. Since the U.S. markets are richly valued, you should consider having a substantial portion in international equities, which are far more reasonably valued. However you proceed, do not be tempted to think in terms of a short time "gamble", which is most likely what you would be taking.
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,
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.